Instructions for Form 1116, Foreign Tax Credit by hvz13267

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									2006                                                                                                        Department of the Treasury
                                                                                                            Internal Revenue Service



Instructions for Form 1116
Foreign Tax Credit
(Individual, Estate, or Trust)
Section references are to the Internal           • All of your foreign source gross                  To make the election, just enter on
Revenue Code unless otherwise noted.             income was from the “passive income”             the foreign tax credit line of your tax
                                                 category (which includes most interest           return (for example, Form 1040, line 47)
General Instructions                             and dividends) (see page 3). However,
                                                 for this purpose, passive income also
                                                                                                  the smaller of (a) your total foreign tax
                                                                                                  or (b) your regular tax (for example,
                                                 includes (a) income subject to the               Form 1040, line 44).
What’s New for 2006                              special rule for high-taxed income
Source of compensation for labor or              described on page 4, (b) income that
                                                 would be passive except that it is also
                                                                                                  Purpose of Form
personal services. New rules apply in                                                             Who should file. File Form 1116 to
determining the source of                        described in another category, and (c)
compensation for labor or personal               certain export financing interest.               claim the foreign tax credit if the
                                                 • All the income and any foreign taxes           election above does not apply and:
services performed as an employee.
Under the new rules, compensation                paid on it were reported to you on a             • You are an individual, estate, or trust,
                                                 qualified payee statement. Qualified             and
(other than fringe benefits) is sourced
on a time basis. Fringe benefits (such           payee statements include Form                    • You paid or accrued certain foreign
as housing and education) are sourced            1099-DIV, Form 1099-INT, Schedule                taxes to a foreign country or U.S.
on a geographical basis. See Pub 514             K-1 (Form 1041), Schedule K-1 (Form              possession.
for more information.                            1065), Schedule K-1 (Form 1065-B),                  See Foreign Taxes Eligible for a
                                                 Schedule K-1 (Form 1120S), or similar            Credit on page 2 to determine if the
   Or you may be able to use an                  substitute statements.                           taxes you paid or accrued qualify for
alternative basis to determine the               • Your total creditable foreign taxes are        the credit.
source. See Line 1b next.                        not more than $300 ($600 if married                 Do not use Form 1116 to figure a
                                                 filing a joint return).                          credit for taxes paid to the U.S. Virgin
   Line 1b. If you are an employee and
your total compensation for personal                This election is not available to             Islands. Instead, use Form 8689,
services performed both inside and               estates or trusts.                               Allocation of Individual Income Tax to
outside the United States was                                                                     the U.S. Virgin Islands.
$250,000 or more, and you are using                  If you make this election:                   Nonresident aliens. If you are a
an alternative basis to determine the            • You cannot carry over to any other             nonresident alien, you generally cannot
source of this compensation, you must            year any foreign taxes paid or accrued           take the credit. However, you may be
check the box on line 1b. See the                in a tax year to which the election              able to take the credit if:
instructions for line 1b on page 13.             applies (but carryovers to and from
                                                 other years are unaffected). See the
                                                                                                  • You were a resident of Puerto Rico
                                                                                                  during your entire tax year, or
Election To Claim the                            instructions for line 10 on page 15.
                                                 • You are still required to take into            • You pay or accrue tax to a foreign
                                                                                                  country or U.S. possession on income
Foreign Tax Credit                               account the general rules for                    from foreign sources that is effectively
                                                 determining whether a tax is creditable.         connected with a trade or business in
Without Filing Form 1116                         See Foreign Taxes Eligible for a Credit          the United States. But if you must pay
You may be able to claim the foreign             and Foreign Taxes Not Eligible for a             tax to a foreign country or U.S.
tax credit without filing Form 1116. By          Credit on this page.                             possession on income from U.S.
making this election, the foreign tax            • You are still required to reduce the           sources only because you are a citizen
credit limitation (lines 14 through 20 of        taxes available for credit by any amount         or a resident of that country or U.S.
the form) will not apply to you. This            you would have entered on line 12 of             possession, do not use that tax in
election is available only if you meet all       Form 1116. See the instructions for              figuring the amount of your credit.
of the following conditions.                     Line 12 on page 15.
                                                                                                     See section 906 for more information
                                                                                                  on the foreign tax credit allowed to a
Tax Help                                                                                          nonresident alien individual.
 For more information about, or assistance with figuring, the foreign tax credit, the following
 IRS resources are available.
                                                                                                  Credit or Deduction
                                                                                                  Instead of claiming a credit for eligible
 IRS Contacts               • Call 1-800-829-1040 (in U.S. and Puerto Rico).                      foreign taxes, you can choose to
                            • Call 215-516-2000 (overseas) (not toll free).
                                                                                                  deduct foreign income taxes. Form
                                                                                                  1040 filers choosing to do so would
                            • Contact IRS offices at U.S. embassies in London, Paris, or          deduct foreign income taxes on
                              the U.S. consulate in Frankfurt.                                    Schedule A (Form 1040), Itemized
                            • Write to Internal Revenue Service, International Section,           Deductions. Generally, if you take the
                              P.O. Box 920, Bensalem, PA 19020-8518.                              credit for any eligible foreign taxes, you
                                                                                                  cannot take any part of that year’s
 Publications               •   Pub. 54, Tax Guide for U.S. Citizens and Resident Aliens          foreign taxes as a deduction. However,
                                Abroad.                                                           even if you take the credit for eligible
                            •   Pub. 514, Foreign Tax Credit for Individuals.                     foreign taxes for the year, you can take
                            •   Pub. 519, U.S. Tax Guide for Aliens.                              a deduction for:
                            •   Pub. 570, Tax Guide for Individuals With Income From U.S.
                                                                                                  • Foreign taxes not allowed as a credit
                                                                                                  because of boycott provisions.
                                Possessions.                                                      • Taxes paid to certain foreign
                            •   Pub. 575, Pension and Annuity Income.                             countries for which a credit has been
                                                                                                  denied, as described in item (2) under

                                                                Cat. No. 11441F
Foreign Taxes Not Eligible for a Credit      international terrorism, countries with        the taxes relate. However, you cannot
on this page.                                which the United States does not have          do so if either of the following apply.
• Taxes on income or gain that are not       diplomatic relations, or countries whose       • The foreign taxes are actually paid
creditable because you do not meet the       governments are not recognized by the          more than 2 years after the close of the
holding period requirement, as               United States. Pub. 514 contains a list        tax year to which they relate.
described in item (3) or (5) under           of these countries.                            • The foreign taxes are actually paid in
Foreign Taxes Not Eligible for a Credit          3. Foreign taxes withheld on a             a tax year prior to the year to which
on this page.                                dividend from a corporation, if you have       they relate.
• Taxes on income or gain that are not       not held the stock for at least 16 days           Accrued foreign taxes not eligible for
creditable because you have to make          within the 31-day period that begins 15        conversion at the yearly average
related payments, as described in item       days before the ex-dividend date. This         exchange rate must be converted using
(4) or (6) under Foreign Taxes Not           required holding period is greater for         the exchange rate on the date of
Eligible for a Credit on this page.          preferred-stock dividends attributable to      payment of the tax.
• Certain taxes paid or accrued to a         periods totaling more than 366 days.
foreign country in connection with the       See section 901(k)(3) or Pub. 514.             Election to use exchange rate on
purchase or sale of oil or gas extracted         4. Foreign taxes withheld on a             date paid. If you have accrued foreign
in that country, as described in item (8)    dividend to the extent that you have to        taxes that you are otherwise required to
under Foreign Taxes Not Eligible for a       make related payments on positions in          convert using the average exchange
Credit on this page.                         similar or related property.                   rate, you may elect to use the
                                                                                            exchange rate in effect on the date the
    If you want to change your election          Example. You receive a dividend            foreign taxes are paid if the taxes are
to take a deduction instead of a credit,     subject to foreign withholding tax. You        denominated in a foreign currency.
or a credit instead of a deduction, you      are obligated to pay someone else an           Once made, the election applies to the
must do so within a special 10-year          amount equal to all these dividends you        tax year for which made and all
limitation period. See Pub. 514 for more     receive. You cannot claim a foreign tax        subsequent tax years unless revoked
information.                                 credit for the withholding tax on these        with the consent of the IRS. The
                                             dividends.                                     election is available for tax years
Foreign Taxes Eligible                           5. Foreign taxes withheld on income        beginning after 2004. It must be made
                                             or gain (other than dividends) from
for a Credit                                 property if you have not held the
                                                                                            by the due date (including extensions)
                                                                                            for filing the tax return for the first tax
You can take a credit for income, war        property for at least 16 days within the       year to which the election applies.
profits, and excess profits taxes paid or    31-day period that begins 15 days              Make the election by attaching a
accrued during your tax year to any          before the date on which the right to          statement to the applicable tax return.
foreign country or U.S. possession, or       receive the payment arises. See
any political subdivision (for example,      section 901(l) or Pub. 514.                    Special rules for a qualified business
city, state, or province), agency, or            6. Foreign taxes withheld on income        unit. If you have a qualified business
instrumentality of the country or            or gain (other than dividends) from            unit, see Pub. 514 for special rules for
possession. This includes taxes paid or      property to the extent you have to make        converting foreign income and taxes
accrued in lieu of a foreign or              related payments on positions in similar       into U.S. dollars. You may have a
possession income, war profits, or           or related property.                           qualified business unit if you own and
excess profits tax that is otherwise             7. Payments of foreign tax that are        operate a business or are
generally imposed. For purposes of the       returned to you in the form of a subsidy.      self-employed in a foreign country.
credit, U.S. possessions include Puerto          8. Taxes paid or accrued to a
Rico, Guam, the Commonwealth of the          foreign country in connection with the         Foreign Tax Credit
Northern Mariana Islands, and                purchase or sale of oil or gas extracted
American Samoa.                              in that country if you do not have an          Redeterminations
    U.S. citizens living in certain treaty   economic interest in the oil or gas, and       If you claim a credit for foreign taxes
countries may be able to take an             the purchase price or sales price is           paid, and you receive a refund of all or
additional foreign tax credit for foreign    different from the fair market value of        part of those taxes in a later year, you
tax imposed on certain items of income       the oil or gas at the time of the              must file an amended return reducing
from the United States. See Tax              purchase or sale.                              the taxes credited by the amount
Treaties in Pub. 514 for details. If this        9. Foreign taxes paid or accrued on        refunded.
applies to you, use the worksheet near       income for which you are claiming an               If you claim the foreign tax credit
the back of Pub. 514 to help you figure      exclusion on Form 8873, Extraterritorial       based on foreign taxes accrued instead
this additional credit.                      Income Exclusion. However, see                 of foreign taxes paid, your credit must
                                             section 943(d) for an exception for            be redetermined in any of the following
Foreign Taxes Not                            certain withholding taxes.                     situations.
                                                                                                1. Your accrued taxes when paid
Eligible for a Credit                           You cannot take a credit for any
                                                                                            differ from the amount you claimed as a
You cannot take a credit for the             interest or penalties you must pay.
                                                                                            credit.
following foreign taxes.                                                                        2. You do not pay the accrued taxes
    1. Taxes paid to a foreign country       Foreign Currency                               within 2 years after the close of the tax
that you do not legally owe, including
amounts eligible for refund by the
                                             Conversion                                     year to which they relate.
                                                                                                3. After you pay the accrued taxes,
foreign country. If you do not exercise      Report all amounts in U.S. dollars             you receive a full or partial refund of
your available remedies to reduce the        except where specified otherwise in            them.
amount of foreign tax to what you            Part II. If you have to convert from
legally owe, a credit for the excess         foreign currency, attach a detailed                For item (2) above, foreign taxes
amount is not allowed.                       explanation of how you figured the             paid more than 2 years after the close
                                             conversion rate.                               of the tax year to which they relate can
    Example. Country X withholds $25
of tax from a payment made to you.               If you take a credit for taxes paid, the   be taken into account in figuring the
Under the income tax treaty between          conversion rate is the rate of exchange        foreign tax credit for the year to which
the United States and Country X, you         in effect on the day you paid the foreign      they relate. However, the taxes must be
owe only $15 and can claim a refund          taxes (or on the day the tax was               converted into dollars at the exchange
from Country X for the other $10. Only       withheld). If you receive a refund of          rate in effect at the time they are paid.
$15 is eligible for the foreign tax credit   foreign taxes paid, the conversion rate            If any of the above situations occurs
(whether or not you apply for a refund).     is the rate in effect when you paid the        after you file your return, you must file
    2. Taxes imposed by and paid to          taxes, not when you receive the refund.        Form 1040X, Amended U.S. Individual
certain foreign countries. These                 If you choose to account for foreign       Income Tax Return, or other amended
countries are those designated by the        income taxes on an accrual basis, you          return, to notify the IRS so that your
Secretary of State as countries that         must generally use the average                 U.S. tax for the year or years affected
repeatedly provide support for acts of       exchange rate for the tax year to which        can be redetermined. Complete and
                                                                 -2-
attach to Form 1040X (or other               non-income-producing investment              profits attributable to “foreign trade
amended return) a revised Form 1116          property, and gains from foreign             income.” Foreign trade income is the
for the tax year(s) affected. See            currency or commodities transactions.        gross income of a FSC attributable to
Temporary Regulations section                Capital gains not related to the active      foreign trading gross receipts.
1.905-4T(b) for more information.            conduct of a trade or business are also
                                             generally passive income.                    g. Lump-Sum Distributions
         If you do not notify the IRS of a                                                You can take a foreign tax credit for
  !      foreign tax refund or change in
 CAUTION the dollar amount of foreign
                                                Passive income does not include
                                             high withholding tax interest, export        taxes you paid or accrued on a foreign
                                             financing interest, active business rents    source lump-sum distribution from a
taxes paid or accrued, you may have to                                                    pension plan. Special formulas may be
pay a penalty.                               and royalties, or high-taxed income
                                             (see High-Taxed Income on page 4).           used to figure a separate tax on a
    See Pub. 514 for more information.                                                    qualified lump-sum distribution for the
                                                Passive income also does not              year in which the distribution is
Tax years beginning before 1998.             include gain from the sale of inventory
For the rules relating to redetermining                                                   received. See Pub. 575 for more
                                             or property held primarily for sale to       information.
U.S. taxes for years beginning before        customers in the ordinary course of
1998, see Pub. 514.                          your trade or business; gain from                If you are able to elect, and do elect,
                                             commodities hedging transactions; and        to figure your U.S. tax on a lump-sum
Income From Sources                          active business gains or losses of           distribution using Form 4972, Tax on
                                             producers, processors, merchants, or         Lump-Sum Distributions, a separate
Outside the                                  handlers of commodities. It may also         foreign tax credit limitation applies. Use
United States                                not include dividends, interest, rents, or   a separate Form 1116. On this
                                             royalties received from a controlled         separate Form 1116, check box g
This income generally includes, but is                                                    above Part I. Skip Part I. Complete Part
not limited to, the following.               foreign corporation (CFC) in which you
                                                                                          II showing only foreign taxes that are
• Compensation for services                  are a U.S. shareholder who owns 10%
                                                                                          attributable to the lump-sum
performed outside the United States.         or more of the total voting power of all
                                                                                          distribution. Then, complete the
• Interest income from a payer located       classes of the corporation’s stock.
                                                                                          Worksheet for Lump-Sum Distributions,
outside the United States.                   b. High Withholding Tax                      on page 4, to figure the amounts to
• Dividends from a corporation                                                            enter in Part III.
incorporated outside the United States.      Interest
• Gain on the sale of nondepreciable         In general, high withholding tax interest    h. Section 901(j) Income
personal property you sold while             is foreign interest that is subject to a     No credit is allowed for foreign taxes
maintaining a tax home outside the           foreign withholding or other gross-basis     imposed by and paid or accrued to
United States, if you paid a tax of at       tax of 5% or more.                           certain sanctioned countries. However,
least 10% of the gain to a foreign                                                        income derived from each such country
country.                                     c. Financial Services Income                 is subject to a separate foreign tax
   Special rules apply in determining        Financial services income generally          credit limitation. Therefore, you must
the source of income from the sale of        includes income derived by a financial       use a separate Form 1116 for income
inventory; sale of depreciable property      services entity predominantly engaged        derived from each such country.
used in a trade or business; sale of         in the active conduct of a banking,
                                             financing, insurance, or similar                 These countries are those
intangible property such as a patent,                                                     designated by the Secretary of State as
copyright, or trademark; ocean               business. Financial services income of
                                             a financial services entity also includes    countries that repeatedly provide
activities; and transportation services                                                   support for acts of international
that begin or end in the United States       passive income and certain incidental
                                             income; however, no part of the              terrorism, countries with which the
or a U.S. possession. See Pub. 514 for                                                    United States does not have diplomatic
more information.                            passive income that is financial
                                             services income is treated as                relations, or countries whose
Compensation for labor or personal           high-taxed income (see High-Taxed            governments are not recognized by the
services as an employee. If you are          Income on page 4).                           United States. Pub. 514 contains a list
an employee and receive compensation                                                      of these countries.
for labor or personal services                   If you qualify as a financial services
                                             entity because you treat certain items           If you paid taxes to a country that
performed both inside and outside the                                                     ceased to be a sanctioned country
United States, special rules apply in        of income as active financing income
                                             under Regulations section                    during the tax year, see Pub. 514 for
determining the source of the                                                             details on how to figure the foreign tax
compensation. Compensation (other            1.904-4(e)(2)(i)(Y), you must show the
                                             type and amount of each item on an           credit for the period that begins after
than fringe benefits) is sourced on a                                                     the end of the sanctions.
time basis. Fringe benefits (such as         attachment to Form 1116.
housing and education) are sourced on                                                     Presidential waiver. For periods
a geographical basis. Or you may be          d. Shipping Income                           beginning on or after February 1, 2001,
able to use an alternative basis to          Shipping income generally includes           the President of the United States has
determine the source. If you use an          income derived from, or in connection        the authority to waive the denial of the
alternative basis, you may have to           with, the use (or hiring or leasing for      credit with respect to a sanctioned
check the box on line 1b (discussed on       use) of any aircraft or vessel in foreign    country if (a) it is in the national interest
page 13). See Pub. 514 for more              commerce, or income derived from             of the United States and will expand
information.                                 space and ocean activities. Treat            trade and investment opportunities for
                                             income that is both shipping income          U.S. companies in such sanctioned
                                                                                          country, and (b) the President reports
Categories of Income                         and financial services income as
                                             financial services income.                   to the Congress, not less than 30 days
Use a separate Form 1116 to figure the                                                    before the waiver is granted, the
credit for each category of foreign          e. Dividends From a DISC or                  intention to grant such a waiver and the
source income listed above Part I of         Former DISC                                  reason for such waiver.
Form 1116. The following instructions
tell you what kind of income to include      This category includes dividends from a               Since no credit is allowed for
in each category. For more information,      DISC (domestic international sales             TIP taxes paid to sanctioned
see Pub. 514, section 904, and               corporation) or former DISC to the                    countries, you would generally
Regulations sections 1.904-4 and             extent these dividends are treated as        complete Form 1116 for this category
1.904-5.                                     foreign sourced. See section 992(a).         only through line 16.
a. Passive Income                            f. Certain Distributions From                i. Certain Income Re-sourced
Passive income generally includes            a FSC or Former FSC                          by Treaty
dividends, interest, royalties, rents,       This category includes distributions         If a sourcing rule in an applicable
annuities, gain from the sale of property    from a FSC (foreign sales corporation)       income tax treaty treats any of the
that produces such income or of              or former FSC out of earnings and            specific types of income described
                                                                 -3-
below as foreign source, and you elect                 • Gains from the sale of inventory or        rules below to report that information on
to apply the treaty, the income will be                depreciable property used in a trade or      Form 1116.
treated as foreign source.                             business that do not fall into one of the
                                                                                                    General Information for
• Certain gains (section 865(h)), or                   above categories.
                                                                                                    Partners and S Corporation
• Certain income from a U.S.-owned                                                                  Shareholders
foreign corporation (section 904(g)(10)).              Special Rules
See Regulations section 1.904-5(m)(7)                                                               Less-than-10% limited partners and
for an example.                                        High-Taxed Income                            certain less-than-10% S corporation
                                                       In some cases, passive income and            shareholders. If you are a limited
Important. You must compute a                                                                       partner or an S corporation shareholder
separate foreign tax credit limitation for             taxes must be treated as general
                                                       limitation income and taxes. Generally,      who does not actively participate in the
any such income for which you claim                                                                 management of the S corporation and
benefits under a treaty, using a                       passive income and taxes must be
                                                       placed in the general limitation income      you own a less-than-10% interest (by
separate Form 1116 for each amount of                                                               value) in the partnership or S
re-sourced income from a treaty                        category if the foreign taxes you paid
                                                       on the income (after allocation of           corporation, you generally may assign
country. Add the amounts from line 21                                                               exclusively to the passive income
of each separate Form 1116 and enter                   expenses) exceed the highest U.S. tax
                                                       that can be imposed on the income.           category your distributive share of
the total on line 28 of your summary                                                                foreign source income and deductions
Form 1116 (that is, the Form 1116 for                  However, no part of the passive income
                                                       that is financial services income is         from that partnership or S corporation.
which you are completing Part IV).                                                                  See Regulations section 1.904-5(h)(2)
                                                       treated as high-taxed income. See
         Other types of income that are                Regulations section 1.904-4(c) for more      for more details and exceptions.
 TIP re-sourced under the terms of                     information.                                          This rule takes precedence over
         an income tax treaty (for
example, compensation for services                     Look-Through Rules                             !      the income category rules
                                                                                                     CAUTION outlined in the instructions that
performed in the United States by a                    Certain income received or accrued by        follow for line 16, codes C and D – F, (or
U.S. citizen resident in a foreign                     you as a 10%-or-more U.S. shareholder        line 14, codes C and D – F) of the
country) are not subject to a separate                 in a controlled foreign corporation          Schedule K-1, and the apportionment
foreign tax credit limitation. However,                (CFC) is treated as income in one of         of deductions rules outlined in the
the specific treaty may provide for other              the separate limitation categories listed    instructions on page 5 for line 16,
restrictions on the amount of income                   under Categories of Income starting on       codes H and I – K, (or line 14 codes H
that is re-sourced or the amount of                    page 3. For example, Subpart F               and I – K) of the Schedule K-1.
credit that is allowed with respect to                 inclusions, dividends, interest, rents,      Reporting amounts on Form 1116.
foreign tax paid on re-sourced income.                 and royalties from a CFC are treated as      Include amounts reported to you on
See, for example, article 24, paragraph                separate limitation income to the extent     Schedule K-1 with any other amounts
1, of the treaty between France and the                they are attributable to separate            reportable on Form 1116 using:
United States.                                         limitation income of the CFC. See            • A separate Form 1116 for each
                                                       Regulations section 1.904-5 for more         category of income.
j. General Limitation Income                           information.                                 • A separate column in Part I and a
General limitation income is income                                                                 separate line in Part II for each country
that does not fall into one of the above               Reporting Foreign Tax                        or possession.
categories. Common examples include:                   Information From
• Wages, salary, and overseas                          Partnerships and S
                                                                                                    Explanation of Certain Line
allowances of an individual as an                                                                   Items on Schedule K-1
employee.                                              Corporations
• Income earned in the active conduct                  If you received a 2006 Schedule K-1                 In each instance that follows,
of a trade or business that does not fall              from a partnership or S corporation that      TIP the first line reference is to the
into one of the above categories.                      includes foreign tax information, use the             Schedule K-1 for Form 1065
                                                                                                    and the second line reference is to the
                                                                                                    Schedule K-1 for Form 1120S. (The
                                                                                                    Schedule K-1 for Form 1065-B includes
Worksheet for Lump-Sum Distributions                                      (Keep for Your Records)   all foreign tax information in an
                                                                                                    attachment for box 9.)
                                                                                                    Line 16, code B, or line 14, code B —
1. Enter the amount from Form 1116, line 8 . . . . . . . . . . . . . . . . . 1.                     Gross income from all sources.
                                                                                                    Combine your distributive share of
2. Enter the sum of the amounts from Form 4972, lines 6 and 12,                                     “gross income from all sources” with all
   that are from foreign sources. Also enter this amount                                            of your other gross income and enter
   on Form 1116, line 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.           the total on line 3e. “Gross income from
                                                                                                    all sources” is a constant amount (that
3. Enter the sum of the amounts from Form 4972, lines 6 and 12,                                     is, you will enter the same amount on
   that are from all sources (both U.S. and foreign). Also enter                                    line 3e of all Forms 1116 that you file).
   this amount on Form 1116, line 17 . . . . . . . . . . . . . . . . . . . . . . 3.                 Line 16, code C, or line 14, code C —
                                                                                                    Gross income sourced at partner or
4. Divide line 2 by line 3. Enter the result as a decimal (rounded                                  shareholder level. This line includes
   to at least four places) here and on Form 1116, line 18. If                                      income from the sale of eligible
   line 2 is equal to or more than line 3, enter “1” . . . . . . . . . . . . . 4.                   personal property (most personal
                                                                                                    property other than inventory,
5. Enter the amount from Form 4972, line 30. Also include                                           depreciable property, and certain
   this amount on Form 1116, line 19 . . . . . . . . . . . . . . . . . . . . . . 5.                 intangible property). See Pub. 514 for
                                                                                                    details.
    Caution: Do not include the amount on line 5 above in the                                                Although all income reported to
    tax you enter on line 19 of any other Form 1116 you
    are filing.
                                                                                                      !      you on this line of the Schedule
                                                                                                     CAUTION K-1 has been apportioned to

                                                                                                    separate categories of income, you
6. Multiply line 5 by line 4. Enter the result here and on                                          must nevertheless first determine
   Form 1116, line 20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.          (using the rules below) whether the
                                                                                                    income on this line is U.S. source
7. Enter the smaller of line 1 or line 6 here and on Form 1116,                                     income or foreign source income. Then,
   line 21. To the left of line 21, write “LSD” . . . . . . . . . . . . . . . . . 7.                enter only foreign source income in Part
                                                                                                    I of each of the applicable Forms 1116
                                                                                -4-
(that is, those Forms 1116 for each          The partnership or S corporation has        the applicable Form 1116. Expenses
category of income you received from         reported this income to you by country      that you allocate to U.S. source income
the partnership or S corporation).           and by category of income. Include          should not be entered on any line of
    Use the following rules to source the    these amounts in Part I of each of the      Part I of Form 1116.
income reported to you on this line of       applicable Forms 1116 (that is, those
                                             Forms 1116 for each category of             Line 16, codes I, J, and K, or line 14,
the Schedule K-1. If you are a U.S.          income you received).                       codes I, J, and K — Deductions
resident (as defined below), the income                                                  allocated and apportioned at
is U.S. source income. If you are a                 You should disregard any             partnership or S corporation level to
nonresident (as defined below), the           TIP information shown on your              foreign source income. The
income is foreign source income.                      Schedule K-1 pertaining to         partnership or S corporation has
    U.S. resident. A U.S. resident is a      gross income attributable to a foreign      already allocated these expenses to
U.S. citizen or resident alien who does      branch. It is intended only for corporate   foreign source income and has reported
not have a tax home in a foreign             partners preparing Form 1118.               them to you by country and by category
country or a nonresident alien who has                                                   of income. Include these amounts on
a tax home in the United States.             Line 16, code G, or line 14, code G —       line 2 of each of the applicable Forms
                                             Interest expense. See the instructions      1116 (that is, those Forms 1116 for
    Tax home. Generally, your tax            for line 4b on page 14 to allocate and      each category of income you received).
home is the general area of your main        apportion the interest expense shown
place of business, employment, or post       on this line of Schedule K-1. In applying           You should disregard any
of duty, regardless of where you             those instructions, take into account        TIP information shown on your
maintain your family home. Your tax          your distributive share of the                      Schedule K-1 pertaining to
home is the place where you are              partnership’s or S corporation’s gross      definitely allocable deductions
permanently or indefinitely engaged to       income (for purposes of the $5,000          attributable to a foreign branch. It is
work as an employee or self-employed         threshold) or your pro rata share of the    intended only for corporate partners
individual. If you do not have a regular     partnership’s or S corporation’s assets.    preparing Form 1118.
or main place of business because of         However, if you were a limited partner
the nature of your work, then your tax       or an S corporation shareholder who         Line 16, codes L and M, or line 14,
home is the place where you regularly        did not actively participate in the         codes L and M — Total foreign taxes.
live. If you do not fit either of these      management of the S corporation and         The partnership or S corporation has
categories, you are considered an            your interest in the partnership or S       already allocated and apportioned total
itinerant and your tax home is wherever      corporation was less than 10%, see the      foreign taxes for you and has reported
you work.                                    next paragraph. Include interest            them to you by country and by category
    Nonresident. A nonresident is any        expense that you allocate to foreign        of income. Include these amounts in
person who is not a U.S. resident. U.S.      source income on line 4b of the             Part II of each of the applicable Forms
citizens and resident aliens with a          applicable Form 1116. Do not enter in       1116 (that is, those Forms 1116 for
foreign tax home will not be treated as      Part I of Form 1116 any interest            each category of income you received).
nonresidents for a sale of eligible          expense that you allocate to U.S.           Line 16, code N, or line 14, code N —
personal property unless a foreign tax       source income.                              Reduction in taxes available for
of 10% or more was paid or accrued on            Less-than-10% limited partners          credit. The partnership or S
the gain on the sale (or, in the case of a   and certain less-than-10% S                 corporation has already apportioned the
loss sale, a foreign tax of 10% or more      corporation shareholders. If you are        reduction in taxes available for credit
would have been paid had the sale            a limited partner or an S corporation       and has reported it to you by country
resulted in a gain).                         shareholder (who does not actively          and by category of income. Include
Note. To help you with these rules, the      participate in the management of the S      these amounts on line 12 of each of the
partnership or S corporation has             corporation) and you own (directly or       applicable Forms 1116 (that is, those
specifically identified the following.       indirectly) a less-than-10% interest (by    Forms 1116 for each category of
• Gains on the sale of eligible personal     income) in the partnership or S             income you received).
property for which a foreign tax of 10%      corporation, you may generally allocate
or more was paid or accrued.                 your distributive share of interest
• Losses on the sale of eligible             expense from that partnership or S          Foreign Qualified
personal property for which a foreign        corporation to foreign or U.S. source
                                             income based on your distributive share
                                                                                         Dividends and Capital
tax of 10% or more would have been
paid had the sale resulted in a gain.        of the gross foreign or U.S. source         Gains (Losses)
                                             income of that partnership or S             If you have foreign source qualified
    Include foreign source income in         corporation. The interest expense you       dividends or foreign source capital
Part I of the applicable Form 1116 (that     allocate to foreign source income           gains (including any foreign source
is, the Form 1116 for each category of       generally may be apportioned                capital gain distributions) or losses, you
income provided to you for this line of      exclusively to the passive income           may be required to make certain
the Schedule K-1). Do not include in         category. However, see Temporary            adjustments to those amounts before
Part I of Form 1116 income that you          Regulations section 1.861-9T(e)(4) for      taking them into account on line 1a
determined (using the above rules) to        exceptions.                                 (qualified dividends and gains) or line 5
be U.S. source income.                                                                   (losses).
                                             Line 16, code H, or line 14, code H —
         If the partnership or S             Other expenses. This line includes             If you completed the Qualified
  !      corporation has specifically
 CAUTION identified any capital gains or
                                             expenses (other than interest expense)      Dividends and Capital Gain Tax
                                             of the partnership or S corporation that    Worksheet in the instructions for your
losses or unrecaptured section 1250          must be allocated and apportioned at        tax return, and are not required to file
gain on this line (Schedule K-1, line 16,    the partner or shareholder level (for       Schedule D, see Qualified Dividends
code C, or line 14, code C) and you          example, research and experimental          and Capital Gain Tax Worksheet
have determined that those gains or          expenses).                                  (Individuals), next, to determine the
losses are foreign source, see Foreign                                                   adjustments you may be required to
Qualified Dividends and Capital Gains            Combine your distributive share of
                                             these expenses with all of your other       make. If you completed the Qualified
(Losses) starting on this page before                                                    Dividends Tax Worksheet in the
entering an amount in Part I of              like expenses, if any, and then allocate
                                             and apportion them using the                Instructions for Form 1041, see
Form 1116.                                                                               Qualified Dividends Tax Worksheet
                                             applicable rules (for example, for
Line 16, codes D, E, and F, or line 14,      research and experimental expenses,         (Estates and Trusts), later, to determine
codes D, E, and F — Foreign gross            the rules under Regulations section         the adjustments you may be required to
income sourced at partnership or S           1.861-17(f)).                               make. If you are required to file
corporation level. Income reported on                                                    Schedule D, see Schedule D Filers, on
this line has already been sourced for           Include expenses that you allocate      page 6, to determine the adjustments
you by the partnership or S corporation.     to foreign source income on line 2 of       you may be required to make.
                                                                -5-
Qualified Dividends and                        How to make adjustments. To adjust           1116 if one of the following applies to
                                               your foreign source qualified dividends      you.
Capital Gain Tax Worksheet                     or capital gain distributions, multiply          1. You figured your tax using the
(Individuals)                                  your foreign source qualified dividends      Qualified Dividends and Capital Gain
If you completed the Qualified                 or capital gain distributions in each        Tax Worksheet in the Form 1040
Dividends and Capital Gain Tax                 separate category by 0.4286. Include         instructions, line 7 of that worksheet is
Worksheet in your tax return                   the results on line 1a of the applicable     greater than zero, and line 17 of that
instructions and you do not have to file       Form 1116.                                   worksheet is less than line 18.
Schedule D, you may have to adjust                      Do not adjust the amount of any         2. You figured your tax using the
the amount of your foreign source
qualified dividends and capital gain             !      foreign source qualified
                                                CAUTION dividends or capital gain
                                                                                            Qualified Dividends and Capital Gain
                                                                                            Tax Worksheet in the Form 1040NR
distributions.                                 distributions that you elected to include    instructions, line 5 of that worksheet is
Form 1040 filers. You must adjust the          on Form 4952, line 4g.                       greater than zero, and line 15 of that
amount of your foreign source qualified                                                     worksheet is less than line 16.
                                               No adjustments required. If you are              3. You figured your tax using
dividends and capital gain distributions       not required to adjust the amount of
if both of the following apply:                                                             Schedule D (Form 1041), line 23 of
                                               your foreign source qualified dividends
• Line 7 of the Qualified Dividends and        or capital gain distributions, include the
                                                                                            Schedule D is greater than zero, and
                                                                                            line 33 of Schedule D is less than line
Capital Gain Tax Worksheet is greater          amount of your foreign source qualified
than zero.                                                                                  34.
                                               dividends and capital gain distributions
• Line 17 of the Qualified Dividends           in each separate category (without
                                                                                                4. You figured your tax using the
                                                                                            Schedule D Tax Worksheet (in the
and Capital Gain Tax Worksheet is less         adjustment) on line 1a of the applicable
than line 18 of that worksheet.                                                             Schedule D (Form 1040) instructions or
                                               Form 1116.                                   in the Form 1041 instructions), line 17
Form 1040NR filers. You must adjust                                                         of the Schedule D Tax Worksheet is
the amount of your foreign source              Qualified Dividends Tax                      greater than zero, and line 35 of the
qualified dividends and capital gain           Worksheet (Estates and                       Schedule D Tax Worksheet is less than
distributions if both of the following         Trusts)                                      line 36.
apply:                                         If you completed the Qualified
• Line 5 of the Qualified Dividends and        Dividends Tax Worksheet in the               Adjustment exception. If you qualify
Capital Gain Tax Worksheet is greater          Instructions for Form 1041, you must         for the adjustment exception, you do
than zero.                                     adjust the amount of your foreign            not need to make any adjustment to
• Line 15 of the Qualified Dividends           source qualified dividends if:               your foreign source qualified dividends.
and Capital Gain Tax Worksheet is less
than line 16 of that worksheet.
                                               • Line 5 of the Qualified Dividends Tax      You qualify for the adjustment
                                               Worksheet is greater than zero, and          exception if the amount of your foreign
Adjustment exception. If you qualify           • Line 15 of the Qualified Dividends         source net capital gain, plus the
for the adjustment exception, you do           Tax Worksheet is less than line 16 of        amount of your foreign source qualified
not need to make any adjustment to             that worksheet.                              dividends, is less than $20,000 and one
your foreign source capital gains or           Adjustment exception. If you qualify         of the following applies to you.
qualified dividends.                           for the adjustment exception, you do             1. Line 7 of the Qualified Dividends
                                               not need to make any adjustment to           and Capital Gain Tax Worksheet in the
    Adjustment exception for Form                                                           Form 1040 instructions or line 17 of the
1040 filers. You qualify for the               your foreign source qualified dividends.
                                               You qualify for the adjustment               Schedule D Tax Worksheet in the
adjustment exception if you meet both                                                       Schedule D (Form 1040) instructions is
of the following requirements.                 exception if:
                                                   1. Line 5 of the Qualified Dividends     less than or equal to:
    1. Line 7 of the Qualified Dividends                                                        a. $188,450 if married filing jointly or
and Capital Gain Tax Worksheet does            Tax Worksheet does not exceed
                                               $7,400, and                                  qualifying widow(er),
not exceed:                                                                                     b. $94,225 if married filing
    a. $188,450 if married filing jointly or       2. The amount of foreign source
                                               qualified dividends reported on Form         separately,
qualifying widow(er),                          1041, line 2b(2), is less than $20,000.          c. $154,800 if single, or
    b. $94,225 if married filing               For this purpose, ignore any qualified           d. $171,650 if head of household.
separately,                                    dividends you elected to include on              2. Line 5 of the Qualified Dividends
    c. $154,800 if single, or                  Form 4952, line 4g.                          and Capital Gain Tax Worksheet in the
    d. $171,650 if head of household.                                                       Form 1040NR instructions or line 17 of
    2. The amount of your foreign              How to make adjustment. To adjust            the Schedule D Worksheet in the
source capital gain distributions, plus        your foreign source qualified dividends,     Schedule D (Form 1040) instructions is
the amount of your foreign source              multiply your foreign source qualified       less than or equal to:
qualified dividends, is less than              dividends in each separate category by           a. $188,450 if you checked filing
$20,000. For this purpose, ignore any          0.4286. Include the results on line 1a of    status box 6,
capital gain distributions or qualified        the applicable Form 1116.                        b. $94,225 if you checked filing
dividends you elected to include on                                                         status box 3, 4, or 5, or
Form 4952, line 4g.                                     Do not adjust the amount of any
                                                 !      foreign source qualified
                                                CAUTION dividends that you elected to
                                                                                                c. $154,800 if you checked filing
                                                                                            status box 1 or 2.
    Adjustment exception for Form                                                               3. Line 23 of Schedule D (Form
1040NR filers. If you file Form                include on Form 4952, line 4g.
                                                                                            1041) or line 17 of the Schedule D Tax
1040NR, you qualify for the adjustment         No adjustment required. If you are           Worksheet in the Form 1041
exception if you meet both of the              not required to make adjustments to          instructions is less than or equal to
following requirements.                        your foreign source qualified dividends,     $7,400.
    1. Line 5 of the Qualified Dividends       include your foreign source qualified
and Capital Gain Tax Worksheet does            dividends on line 1a of the applicable          Note. Your foreign source net
not exceed:                                    Form 1116 without adjustment.                capital gain is the excess of your net
    a. $188,450 if you checked filing          Schedule D Filers                            long-term capital gain from foreign
status box 6,                                                                               sources over your net short-term capital
    b. $94,225 if you checked filing           Note. Throughout these instructions,         loss from foreign sources. Ignore any
status box 3, 4, or 5, or                      references to Schedule D (Form 1041)         long-term capital gains you elected to
    c. $154,800 if you checked filing          are for estates and trusts only.             include on Form 4952, line 4g, in
status box 1 or 2.                             Adjustments to foreign qualified             determining your foreign source net
    2. The amount of your foreign              dividends. If you are required to file       capital gain. Ignore any qualified
source capital gain distributions, plus        Schedule D (Form 1040, or Form               dividends you elected to include on
the amount of your foreign source              1041), you must adjust the amount of         Form 4952, line 4g, in determining the
qualified dividends, is less than              your foreign source qualified dividends      amount of your foreign source qualified
$20,000.                                       that you include on line 1a of Form          dividends.
                                                                  -6-
    How to make adjustment. To             the adjustments you must make to your       • You figured your tax using the
adjust your foreign source qualified       foreign source capital gains or losses if   Schedule D Tax Worksheet (in the
dividends, multiply your foreign source    you have foreign source capital gains       Schedule D (Form 1040) instructions or
qualified dividends in each separate       or losses in no more than two separate      in the Form 1041 instructions) and (a)
category by 0.4286. Include the results    categories and any of the following         line 17 is zero, (b) line 9 is zero or less,
on line 1a of the applicable Form 1116.    apply.                                      or (c) line 35 is equal to or greater than
         Do not adjust the amount of any   • You qualify for the adjustment            line 36.
  !      foreign source qualified
 CAUTION dividends that you elected to
                                           exception discussed earlier under
                                           Adjustments to foreign qualified                Complete Worksheet A only once,
include on Form 4952, line 4g.             dividends under Schedule D Filers.          even if you have capital gains or losses
    No adjustment required. Include        • Line 15 or 16 of Schedule D (Form         in two separate categories. Keep the
on line 1a of Form 1116 the full amount    1040) (line 14a or 15 of Schedule D         completed Worksheet A for your
of foreign source qualified dividends      (Form 1041)) is zero or a loss.             records. Do not file Worksheet A with
that you are not required to adjust.       • You figured your tax using the            your tax return.
Adjustments to foreign capital gains       Qualified Dividends and Capital Gain
and losses. You must use Worksheet         Tax Worksheet in the Form 1040                 Capital losses are deductible only up
A, Worksheet B, or the instructions for    instructions and (a) line 3 of that         to $3,000 of ordinary income.
Capital Gains and Losses in Pub. 514       worksheet minus the amount on Form             Worksheet B. If you do not qualify
to determine the adjustments you must      4952, line 4e, that you elected to          to use Worksheet A, use Worksheet B
make to your foreign capital gains or      include on Form 4952, line 4g, is zero
losses. Read the instructions below to     or less, (b) line 7 of that worksheet is    on page 9 to determine the adjustments
see if you qualify to use Worksheet A or   zero, or (c) line 17 of that worksheet is   you must make to your foreign source
Worksheet B. If you do not qualify to      equal to or greater than line 18.           capital gains or losses if:
use Worksheet A or Worksheet B, use        • You figured your tax using the            • You have foreign source capital
the instructions for Capital Gains and     Qualified Dividends and Capital Gain        gains or losses in no more than two
Losses in Pub. 514 to determine the        Tax Worksheet in the Form 1040NR            separate categories, and
adjustments you must make.                 instructions and (a) line 3 of that         • You did not complete the
         Before you complete Worksheet     worksheet is zero, (b) line 5 of that       Unrecaptured Section 1250 Gain
  !      A or Worksheet B, you must
 CAUTION reduce each foreign source
                                           worksheet is zero, or (c) line 15 of that
                                           worksheet is equal to or greater than
                                                                                       Worksheet or the 28% Rate Gain
                                                                                       Worksheet in the Schedule D
long-term capital gain by the amount of    line 16.                                    instructions.
that gain you elected to include on        • You figured your tax using Schedule
Form 4952, line 4g. The gain you           D (Form 1041) and (a) line 23 of                Complete Worksheet B only once,
elected to include on Form 4952, line      Schedule D is zero, (b) line 18 of          even if you have capital gains or losses
4g, must be entered directly on line 1a    Schedule D minus the amount on Form         in two separate categories. Keep the
of the applicable Form 1116 without        4952, line 4e, that you elected to          completed Worksheet B for your
adjustment.                                include on Form 4952, line 4g, is zero      records. Do not file Worksheet B with
    Worksheet A. You can use               or less, or (c) line 33 is equal to or      your tax return.
Worksheet A on page 8 to determine         greater than line 34.




                                                              -7-
Worksheet A (See instructions below)                                                                                                 (Keep for Your Records)

                                                                                            Category #1               Category #2

                                                                             Specify


1. Separate category capital gain or (loss) . . . . . . . . . . . . . . . 1.

2. Foreign source capital gain net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.

3. Capital gain net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.

4. Total U.S. capital loss adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.

5. Adjusted separate category capital gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.

6. U.S. capital loss adjustment factor. (For each separate
   category, divide line 1 by line 2 and round off the result
   to at least four decimal places.) . . . . . . . . . . . . . . . . . . . . . 6.

7. U.S. capital loss adjustment. (For each separate category,
   multiply line 4 by line 6.) . . . . . . . . . . . . . . . . . . . . . . . . . . 7.

8. Adjusted separate category capital gain. (For each
   separate category, subtract line 7 from line 1. Enter
   the result here and include the result on line 1a of the
   applicable Form 1116.) . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.


                                                               Instructions for Worksheet A

Line 1. For each separate category for which you have foreign source capital gains or losses, combine your foreign source
capital gains and losses in that separate category and enter the result on line 1. Show a loss on line 1 of this worksheet as a
negative amount and include the loss on line 5 of the Form 1116 you are filing for that separate category.
Line 2. Combine the amounts entered on line 1. If the result is zero or less, do not complete the rest of the worksheet.
Instead, for each separate category with a positive amount on line 1 of this worksheet, include that positive amount on line 1a
of the Form 1116 you are filing for that separate category.
Line 3. Enter the amount from line 16 of Schedule D (Form 1040), less the portion of net capital gain you included on Form
4952, line 4g. If the result is zero or less, enter -0-.
  Estates and trusts: Enter the amount from line 15 of Schedule D (Form 1041), less any amount shown on line 21 of that
Schedule D. If the result is zero or less, enter -0-.
Line 4. Subtract line 3 from line 2 and enter the result on line 4. If the result is zero or less, do not complete the rest of the
worksheet. Instead, for each separate category with a positive amount on line 1 of this worksheet, include that positive
amount on line 1a of the Form 1116 you are filing for that separate category.

Line 5.
• If both separate categories have a positive amount on line 1, skip line 5 and go to line 6.
• If only one separate category has a positive amount on line 1, subtract line 4 from that positive amount. Enter the result
here and include the result on line 1a of the Form 1116 you are filing for that separate category. Skip lines 6 – 8 of this
worksheet.




                                                                                  -8-
Worksheet B (See instructions below)                                                                 (Keep for Your Records)

                                               Category #1                          Category #2
                                         Specify ____________                   Specify __________
                                          (1)                 (2)               (3)                 (4)              (5)
                                       Short-Term         Long-Term          Short-Term         Long-Term           Other
                                                            (15%)                                 (15%)

  1. Separate category rate
     group capital gain or (loss)

  2. U.S. capital loss adjustment
     amount

  3. Subtotal (subtract line 2
     from line 1 gain amounts)

  4. Net U.S. long-term capital
     loss

  5. U.S. long-term capital loss
     adjustment

  6. Excess net U.S. long-term
     capital loss

  7. Long-term capital gain (or
     adjustment amount)

  8. Limitation percentage

  9. Long-term limitation
     amounts

 10. Adjustment amounts

 11. Rate differential adjustments

 12. Long-term gains

 13. Rate differential adjustment

 14. Long-term gain

 15. Adjusted separate category
     capital gains and losses



                                               Instructions for Worksheet B
Line 1. For each separate category:
• Combine your foreign source short-term capital gains and losses and enter the result in column (1) or (3).
• Combine your foreign source long-term capital gains and losses and enter the result in column (2) or (4).
Line 2. Complete the Line 2 Worksheet on page 11 for each column on line 1 with a gain.
Line 4. Enter your net long-term capital loss (if any) from U.S. sources. To determine this amount, subtract your
long-term capital losses from U.S. sources from your long-term capital gains from U.S. sources. Enter the loss (if any)
as a positive amount in column (5). If you do not have a loss, leave line 4 blank and skip lines 5 through 14.
Line 5. Combine the amounts (if any) from columns (2) and (4) on line 2. Enter the result in column (5). If you do not
have any amount entered in either column, enter -0- in column (5).
Line 6. Subtract line 5 from line 4. Enter the result in column (5). If the result is zero or less, leave line 6 blank and skip
lines 7 through 14 of this worksheet.




                                                              -9-
Line 7.
• If you entered an amount in either column (2) or (4) (but not both) of line 3, subtract line 6 from the amount entered in
either column (2) or (4) of line 3. Enter the result in column (2) or (4) on line 7 and skip lines 8 through 12.
• If you entered amounts in both columns (2) and (4) on line 3, combine those amounts and enter the result in column
(5) on line 7.
Line 8. Divide each amount on line 3 by line 7 and enter the results on line 8. Round off each result to at least four
decimal places.
Line 9. Multiply each decimal amount on line 8 by line 6 and enter the results in the appropriate columns on line 9.
Line 10. Subtract line 9, column (2) from line 3, column (2) and enter the result on line 10, column (2). Subtract line 9,
column (4) from line 3, column (4) and enter the result on line 10, column (4).
Line 11. Multiply each amount on line 10 by 0.4286 and enter the results here.
Line 12. Combine line 11, column (2) with line 9, column (2) and enter the result on line 12, column (2) . Combine line
11, column (4) with line 9, column (4) and enter the result on line 12, column (4). Include the amounts on line 1a of the
applicable Form 1116. Skip lines 13 and 14.
Line 13. Multiply the amount on line 7 by 0.4286 and enter the result here in the applicable column.
Line 14. Combine line 6 and line 13 and enter the result here. Include the result on line 1a of the applicable Form 1116.
Line 15.
If you have a:
• Short-term gain shown in column (1) or (3) of line 3, enter the amount of that short-term gain on line 15, column (1)
or (3).
• Long-term gain shown in column (2) or (4) of line 3, and line 6 is blank, multiply the amount of each gain by 0.4286
and enter the result on line 15, column (2) or (4).
• Short-term loss in any column of line 1, complete the Line 15 Worksheet on page 12 for each column with a loss.
• Long-term loss in column (2) or (4) of line 1, multiply the amount of the loss by 0.4286 and enter the result on line 15
in the appropriate column.

After you have completed line 15:
• Include line 15 gain amounts on line 1a of the applicable Form 1116.
• Include line 15 loss amounts on line 5 of the applicable Form 1116.




                                                           -10-
Line 2 Worksheet (For Line 2 of Worksheet B)
                                                                                                                                              (Keep for Your Records)
(See instructions below)

                                                                        Category #1                                    Category #2

                                           Specify

1. Separate category rate group
   gain (or loss) . . . . . . . . . . . . . . . . . 1.

                                                             Short-Term              Long-Term              Short-Term              Long-Term

2. Separate category gain (or loss)                  2.

3. Foreign source capital gain net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.

4. Capital gain net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.

5. Total U.S. capital loss adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.

6. Separate category adjustment . . . . . 6.

7. Rate Group Factor . . . . . . . . . . . . . 7.

8. Rate Group Adjustment . . . . . . . . . 8.

                                                                  Instructions for Line 2 Worksheet

Line 1. Enter your gains and losses from line 1 of Worksheet B. Enter a loss as a negative amount (in parentheses).

Line 2. For each separate category, combine the amounts from line 1. Enter a loss as a negative amount (in parentheses).
Line 3. Combine the amounts from line 2 of this worksheet. If the result is zero or less, stop here. Do not enter any amount on line 2 of
Worksheet B.
Line 4. Enter the amount from line 16 of the Schedule D (Form 1040), less the portion of net capital gain you included on Form 4952, line
4g. If the amount entered on line 4 is zero or less, stop here. Do not continue with this worksheet or Worksheet B. Instead, complete
Worksheet A.
    Estates and trusts: Enter the amount from line 15 of the Schedule D (Form 1041), less any amount shown on line 21 of that Schedule D.
If the amount entered on line 4 is zero or less, stop here. Do not continue with this worksheet or Worksheet B. Instead, complete
Worksheet A.
Line 5. Subtract line 4 from line 3 and enter the result on line 5. If the result is zero or less, stop here. Do not enter any amount on line 2 of
Worksheet B.

Line 6.
• If only one separate category has a positive amount on line 2, enter the amount from line 5 on line 6 (in the column for the separate
category with the positive amount on line 2).
• If both separate categories have positive amounts on line 2, divide each amount on line 2 by line 3. Multiply each result by line 5. Enter
the results on line 6 in the appropriate columns.
Line 7.
For each separate category:
• If you entered an amount on line 6 and you entered positive amounts in both the short-term and long-term columns on line 1, divide each
positive amount on line 1 by line 2 and enter the results in the appropriate columns.
• Leave line 7 blank if you did not enter an amount on line 6 or only one column on line 1 has a positive amount.
Line 8.
For each separate category:
• If you entered amounts on line 7, multiply each amount on line 7 by line 6. Enter the results in the appropriate columns on line 8 of this
worksheet and on line 2 of Worksheet B.
• If line 7 is blank, enter the amount from line 6 in the same column on line 8 as the column that has a gain on line 1. Also, enter the amount
on line 2 of Worksheet B in the appropriate column. If line 6 is blank, do not enter any amount on line 8 of this worksheet or line 2 of
Worksheet B.




                                                                                      -11-
Line 15 Worksheet               (For Line 15 of Worksheet B)                                                                           (Keep for Your Records)


1. Enter your net short-term capital gain (if any) from U.S. sources. To determine this amount, subtract your
   short-term capital losses from U.S. sources from your short-term capital gains from U.S. sources. If the
   result is zero or a loss, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.

 2. If you entered a short-term gain on line 3 of Worksheet B, enter that amount here . . . . . . . . . . . . . . . . . . 2.

3. Add lines 1 and 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.

 4. Did you enter a short-term capital loss on line 1 of Worksheet B for one (but not both) of the separate
    categories?

                  Yes.                   Complete lines 5 – 10 and skip the rest of this worksheet.

                  No.                    Skip lines 5 – 10 and go to line 11.

5. Enter the short-term capital loss from line 1 of Worksheet B (enter the loss as a positive amount) . . . . 5.
6. Enter the gain, if any, determined on line 3. If line 3 is not a gain, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . 6.
7. Subtract line 6 from line 5. If zero or a loss, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.
8. Multiply line 7 by 0.4286 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.
9. Enter the smaller of line 5 or line 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.
10. Add lines 8 and 9. Enter the result here and on line 15 of Worksheet B . . . . . . . . . . . . . . . . . . . . . . . . . . 10.
11. Is the amount on line 1 zero?
                  Yes.                   Multiply each short-term loss by 0.4286. Enter the results on line 15 of
                                         Worksheet B. Skip the rest of this worksheet.
                  No.                    Go to line 12.
12. Enter your short-term loss from Worksheet B, line 1, column (1) (enter the loss as a positive amount) . . 12.
13. Enter your short-term loss from Worksheet B, line 1, column (3) (enter the loss as a positive amount) . . 13.
14. Add lines 12 and 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.
15. Enter the gain determined in line 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.
16. Subtract line 15 from line 14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.
     Is the result zero or less?
                  Yes.                   Skip the rest of this worksheet. Enter each short-term loss from line 1 on line 15
                                         of Worksheet B, in the applicable column, without adjustment (that is, each
                                         short-term loss you enter on line 15 of Worksheet B will be the same as the
                                         short-term loss you entered on line 1 of Worksheet B).
                  No.                    Complete lines 17 – 22.
17. Multiply line 16 by 0.4286 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.
18. Add lines 15 and 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.
19. Divide line 12 by line 14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.
20. Multiply line 19 by line 18. Enter the result here and on Worksheet B, line 15, column (1) . . . . . . . . . . . . . 20.
21. Divide line 13 by line 14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.
22. Multiply line 21 by line 18. Enter the result here and on Worksheet B, line 15, column (3) . . . . . . . . . . . . . 22.




                                                                                  -12-
                                                          Example. If you received dividends      • For each such item, a computation
Specific Instructions                                 (passive income) and wages (general
                                                      limitation income) from foreign sources,
                                                                                                  showing how the alternative allocation
                                                                                                  was computed.
                                                      you must complete two Forms 1116.           • A comparison of the dollar amount of
Part I—Taxable Income                                 On one Form 1116, check box a               the compensation sourced within and
or Loss From Sources                                  (passive income), enter the dividends       without the U.S. under both the
                                                      on line 1a, and write “Dividends” on the    alternative basis and the time or
Outside the United                                    dotted line. On the other Form 1116,        geographical basis for determining the
                                                      check box j (general limitation income),    source.
States                                                enter on line 1a wages not excluded on         You must keep documentation
                                                      Form 2555 or Form 2555-EZ, and write        showing why the alternative basis more
         Part I must be completed by all              “Wages” on the dotted line. Complete
   !     filers unless specifically
 CAUTION indicated otherwise in these
                                                      Parts I, II, and III of each Form 1116.
                                                                                                  properly determines the source of the
                                                                                                  compensation.
                                                      Then, complete the summary Part IV on
instructions.                                         one Form 1116.                              Lines 2 Through 5—
Line l—Foreign Country or                                      If you are filing a Form 1116      Deductions and Losses
U.S. Possession                                           !    that includes foreign source
                                                       CAUTION qualified dividends or foreign
                                                                                                  You must reduce your foreign gross
                                                                                                  income on line 1a by entering on lines 2
Generally, if you received income from,               source capital gains or losses, see         through 5:
or paid taxes to, more than one foreign
country or U.S. possession, report                    Foreign Qualified Dividends and Capital     • Any of your deductions that definitely
                                                      Gains (Losses) starting on page 5.          relate to that foreign income, and
information on a country-by-country
basis on Form 1116, Parts I and II. Use               Line 1b                                     • A ratable share of your other
a separate column in Part I and a                                                                 deductions that do not definitely relate
                                                      You must check the box on line 1b if all    to that foreign income, any other
separate line in Part II for each country             of the following apply.                     foreign income, or U.S. source income.
or possession. If you paid taxes to                   • The income on line 1a is                      Do not include:
more than three countries or
possessions, attach additional sheets
                                                      compensation for services you
                                                      performed as an employee.                   • Deductions and losses related to
following the format of Parts I and II.               • Your total employee compensation          exempt or excluded income, such as
                                                                                                  foreign earned income you have
Lines 1a and 1b—Foreign                               from both U.S. and foreign sources was      excluded on Form 2555 or
                                                      $250,000 or more.
Gross Income                                          • You used an alternative basis             Form 2555-EZ.
                                                                                                  • The deduction for personal
Include income in the category checked                (discussed in Pub. 514) to determine        exemptions. (However, you can include
above Part I that is taxable by the                   the source of the compensation entered      the additional exemptions for housing
United States and is from sources                     on line 1a.                                 Hurricane Katrina displaced individuals
within the country entered on line l. You                 In addition, attach to Form 1116 a      from Form 8914, line 6.)
must include income even if it is not                 statement that contains the following
taxable by that foreign country. Identify             information.                                    Special rules apply to the allocation
the type of income on the dotted line                 • The specific compensation income or       of research and experimental
                                                                                                  expenditures. See Regulations section
next to line 1a. Do not include any                   the specific fringe benefit for which the
earned income excluded on Form 2555,                  alternative basis is used.                  1.861-17.
Foreign Earned Income, or Form                        • For each such item, the alternative           If the law of a U.S. state to which
2555-EZ, Foreign Earned Income                        basis of allocation of source used.         you pay income taxes does not
Exclusion.                                                                                        specifically exempt foreign source
                                                                                                  income from tax, you may be required
                                                                                                  to make a special allocation of state
                                                                                                  taxes you paid. See Pub. 514 for more
Worksheet for Home Mortgage Interest                                                              information.
                                                                          Keep for Your Records   Itemized deduction limit. If you must
—Line 4a
                                                                                                  reduce the total amount of your
                                                                                                  itemized deductions on line 28 of
Note: Before you complete this worksheet, read the instructions for line 4a on                    Schedule A (Form 1040) because your
                                                                                                  adjusted gross income was more than
page 14.                                                                                          $150,500 ($75,250 if married filing
                                                                                                  separately), you must reduce each of
1. Enter gross foreign source income* of the type shown on                                        the itemized deductions that are subject
   Form 1116. Do not enter income excluded on Form 2555                                           to the reduction by the reduction
   or Form 2555-EZ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    1.            percentage before you complete lines
                                                                                                  2, 3a, and 4a.
2. Enter gross income from all sources. Do not enter income                                           Use the Itemized Deductions
   excluded on Form 2555 or Form 2555-EZ . . . . . . . . . . . . .                  2.            Worksheet in the Instructions for
                                                                                                  Schedule A (Form 1040) to figure the
3. Divide line 1 by line 2 and enter the result as a decimal                                      reduction percentage. Divide the
   (rounded to at least four places) . . . . . . . . . . . . . . . . . . . .        3.            amount on line 9 of the worksheet (the
                                                                                                  overall reduction) by the amount on line
4. Enter deductible home mortgage interest (from lines 10                                         3 of the worksheet (total itemized
   through 12 of Schedule A (Form 1040))** . . . . . . . . . . . . .                4.            deductions subject to the reduction).
                                                                                                  This is your reduction percentage.
5. Multiply line 4 by line 3. Enter the result here and on the                                    Apply this percentage (expressed as a
   appropriate Form 1116, line 4a . . . . . . . . . . . . . . . . . . . . .         5.            decimal rounded to at least four places)
                                                                                                  to each itemized deduction subject to
*If you have to report income from more than one country on Form 1116, complete                   the reduction to determine the amount
a separate worksheet for each country. Use only the income from that country on                   to enter on the appropriate line of
                                                                                                  Form 1116.
line 1 of the worksheet.
                                                                                                  Note. You do not need to make this
**If you were required to reduce the amount of your itemized deductions on                        computation if the entire amount of your
Schedule A, enter the reduced amount of home mortgage interest on line 4 of the                   itemized deductions is entered on any
                                                                                                  one of the following lines: line 2, line
worksheet.                                                                                        3a, or line 4a. Just enter your reduced
                                                                                                  itemized deductions on that line.

                                                                             -13-
    Example. You are single and have              If you do not itemize deductions,         of your interest expense to U.S. source
an adjusted gross income of $210,500.          enter your standard deduction on             income. Otherwise, each type of
Your itemized deductions subject to the        line 3a.                                     interest expense is apportioned
overall reduction (line 3 of the               Line 3b. Enter on line 3b any other          separately using an “asset method.”
worksheet) total $20,000. $8,000 of            deductions that do not definitely relate     See Pub. 514 for more information.
these deductions are definitely related        to any specific type of income.                 Example. You have investment
to the income on Form 1116, line 1a.           Examples of these deductions are the         interest expense of $2,000. Your assets
The other $12,000 ($20,000 – $8,000)           deduction for alimony paid from Form         of $100,000 consist of stock generating
are real estate taxes, which are not           1040, line 31a, and the additional           U.S. source income (adjusted basis,
definitely related.                            exemptions for housing Hurricane             $40,000) and stock generating foreign
    The amount of the overall reduction        Katrina displaced individuals from Form      source income (adjusted basis,
on line 9 of the worksheet is $1,800. To       8914, line 6.                                $60,000). You apportion 40% ($40,000/
figure the amount of the real estate           Lines 3d and 3e                              $100,000) of $2,000, or $800 of your
taxes to include in the total for line 3a of                                                investment interest, to U.S. source
Form 1116, divide the amount on line 9         For lines 3d and 3e, gross income            income and 60% ($60,000/$100,000) of
($1,800) by the amount on line 3               means income without regard to               $2,000, or $1,200, to foreign source
($20,000). This is your reduction              deductions and losses.                       income. In this example, you will enter
percentage (9%). You must reduce               Line 3d. Enter your gross foreign            the $1,200 apportioned to foreign
your $12,000 deduction by $1,080 (9%           source income from the category you          source income on line 4b. You would
x $12,000). The reduced deduction of           checked above Part I of this                 not enter the $800 apportioned to U.S.
$10,920 ($12,000 – $1,080) is the              Form 1116. Include any foreign earned        source income on any line of Part I of
amount to enter on line 3a of Form             income you have excluded on Form             Form 1116.
1116. Make a similar computation to            2555 or Form 2555-EZ but do not
figure the amount of definitely related        include any other exempt income.             Line 5
itemized deductions ($7,280) to enter             If you had income from more than          If you have capital losses from foreign
on line 2.                                     one country, you must enter income           sources, see Foreign Qualified
                                               from only one country in each column.        Dividends and Capital Gains (Losses)
Line 2                                                                                      starting on page 5 for information on
                                                  If you had to adjust your foreign         adjustments you may be required to
         Before you complete line 2, read      qualified dividends or capital gains (see    make.
  !      Itemized deduction limit on page
 CAUTION 13.
                                               page 5), include those amounts without
                                               regard to any adjustments.
    Enter your deductions that definitely      Line 3e. Enter on line 3e in each
                                               column your gross income from all
                                                                                            Part II—Foreign Taxes
relate to the gross income from foreign        sources and all categories, both U.S.        Paid or Accrued
sources shown on line 1a. For example,         and foreign. Include any foreign earned
if you are an employee reporting               income you have excluded on Form                      See page 2 for descriptions of
foreign earned income on line 1a,
include on line 2 expenses such as             2555 or Form 2555-EZ but do not
                                               include any other exempt income.
                                                                                              !      foreign taxes that are eligible for
                                                                                             CAUTION the foreign tax credit and foreign
those incurred to move to a new                                                             taxes that are not eligible for the foreign
principal place of work outside the               If you are a nonresident alien,
                                               include on both lines 3d and 3e your         tax credit.
United States or supplies you bought
for your job outside the United States.        income that is not effectively connected         You can take a foreign tax credit in
                                               with a trade or business in the United       the tax year you paid or accrued the
    Do not include any interest expense        States.                                      foreign taxes, depending on your
on line 2. See lines 4a and 4b for                                                          method of accounting. If you report on
special rules for interest expense.               If you had to adjust your foreign
                                               qualified dividends or capital gains (see    the cash basis, you can choose to take
Lines 3a and 3b                                page 5), include those amounts without       the credit for accrued taxes by checking
Some deductions do not definitely              regard to any adjustments.                   the “accrued” box in Part II. But once
relate to either your foreign source                                                        you choose to do this, you must credit
income or your U.S. source income.             Line 3f                                      foreign taxes in the year they accrue on
Enter on lines 3a and 3b any                   Divide line 3d by line 3e and round off      all future returns.
deductions (other than interest                the result to at least four decimal places       Generally, you must enter in Part II
expense) that:                                 (for example, if your result is              the amount of foreign taxes, in both the
• Are not shown on line 2, and                 0.8756782, round off to 0.8757, not to       foreign currency denomination(s) and
• Are not definitely related to your U.S.      0.876 or 0.88). Enter the result, but do     as converted into U.S. dollars, that
source income.                                 not enter more than “1.”                     relate to the category of income
Line 3a. Before you complete line 3a,          Line 4a                                      checked above Part I. Taxes are
read Itemized deduction limit starting on                                                   related to the income if the income is
                                               If your gross foreign source income          included in the foreign tax base on
page 13.                                       (including income excluded on Form
    Enter the following itemized                                                            which the tax is imposed. If the foreign
                                               2555 or Form 2555-EZ) does not               tax you paid or accrued relates to more
deductions (from Schedule A (Form              exceed $5,000, you can allocate all of       than one category of income, apportion
1040)) on line 3a.                             your interest expense to U.S. source
• Medical expenses (line 4)                    income. Otherwise, deductible home
                                                                                            the tax among the categories. The
• Real estate taxes (line 6)                   mortgage interest (including points) is
                                                                                            apportionment is based on the ratio of
                                                                                            net foreign taxable income in each
          At the time these instructions       apportioned using a gross income             category to the total net income subject
  !       went to print, Congress was
 CAUTION considering legislation that
                                               method. Use the worksheet on page 13
                                               to figure the amount to enter on line 4a.
                                                                                            to the foreign tax. See Pub. 514 for an
                                                                                            example.
would extend the deduction for general         Before you complete the worksheet,
                                               read Itemized deduction limit on page            However, if foreign tax paid on
sales taxes that expired at the end of                                                      passive income is reported to you in
2005. To find out if this legislation was      13.
                                                                                            U.S. dollars on a Form 1099-DIV,
enacted, and for more details, go to           Line 4b                                      1099-INT, or similar statement, you do
www.irs.gov, click on More Forms and           Other interest expense includes              not have to convert the amount shown
Publications, and then on What’s Hot in        investment interest, interest incurred in    into foreign currency. This rule applies
forms and publications, or see Pub.            a trade or business, and passive             whether or not you can make the
553.                                           activity interest. If you are a U.S.         election to claim the foreign tax credit
    If the legislation is enacted, include     citizen, resident alien, or a domestic       without filing Form 1116 (as explained
the deduction for general sales taxes in       estate, and your gross foreign source        on page 1). Enter “1099 taxes” in Part
the above list.                                income (including any income excluded        II, column (o), and complete columns (t)
                                               on Form 2555 or Form 2555-EZ) does           through (x) for each foreign country
                                               not exceed $5,000, you can allocate all      indicated in Part I.

                                                                 -14-
Note. If you are taking a credit for         accrued during the tax year by the           5471, Information Return of U.S.
additional taxes paid or accrued as the      following fraction.                          Persons With Respect To Certain
result of an audit by a foreign taxing           Numerator: Foreign earned income         Foreign Corporations. If you do not file
authority or you are filing an amended       and housing amounts you excluded for         Form 5471 and furnish all of the
return reflecting a foreign tax refund,      the tax year minus otherwise deductible      information required by the due date of
attach a statement to Form 1116              expenses (not including the foreign          your tax return, reduce by 10% all
identifying these taxes.                     housing deduction) allocable to that         foreign taxes that you otherwise may
                                             income.                                      take into account for the foreign tax
                                                 Denominator: Your total foreign          credit. You may have to make
Part III—Figuring the                        earned income received or accrued            additional reductions if the failure
                                                                                          continues. See section 6038(c) for
Credit                                       during the tax year minus deductible         details and exceptions.
                                             expenses (including the foreign housing
                                             deduction) allocable to that income.         Note. The reduction in foreign taxes is
Line 10                                      However, if the foreign jurisdiction         reduced by any dollar penalty imposed
You can carry back 1 year and then           charges tax on foreign earned income         under section 6038(b).
forward 10 years any foreign tax you         and some other income (for example,          • Reduction for failure to file Form
paid or accrued to any foreign country       earned income from U.S. sources or a         8865. U.S. partners who control a
or U.S. possession (reduced as               type of income not subject to U.S. tax)      foreign partnership must file Form
described on this page) on income in a       and the taxes on the other income            8865, Return of U.S. Persons With
separate category that is more than the      cannot be segregated, the denominator        Respect to Certain Foreign
limitation. First, apply the excess to the   is the total amount of income subject to     Partnerships. If you do not file Form
earliest year to which it may be carried.    foreign tax minus deductible expenses        8865 and furnish all of the information
Then, apply it to the next earliest year,    allocable to that income.                    required by the due date of your tax
and so on. The carryback-carryforward            See Pub. 514 for a comprehensive         return, reduce by 10% all foreign taxes
period cannot be extended even if you        example.                                     that you otherwise may take into
are unable to take a credit in one of the
intervening years.
                                             • Taxes on income from Puerto Rico           account for the foreign tax credit. You
                                                                                          may have to make additional reductions
                                             exempt from U.S. tax. The reduction
    You cannot carry a credit back to a      applies if you have income from Puerto       if the failure continues. See section
tax year for which you claimed a             Rican sources that is not taxable on         6038(c) for details and exceptions.
deduction, rather than a credit, for         your U.S. tax return. To figure the          Note. The reduction in foreign taxes is
foreign taxes paid or accrued. However,      credit, reduce your foreign taxes paid or    reduced by any dollar penalty imposed
you must reduce the amount of any            accrued by the taxes allocable to the        under section 6038(b).
carryback or carryforward by the             exempt income. See Pub. 570 for more         • Reduction of taxes or credit due to
amount that you would have used had          information.                                 international boycott operations. In
you chosen to claim a credit rather than     • Taxes on income from American              general, if you agree to participate in, or
a deduction in that year.                    Samoa excluded from U.S. tax. If you         cooperate with, an international boycott,
    If, for any year, you elected to claim   are a bona fide resident of American         you must file Form 5713, International
the foreign tax credit without filing Form   Samoa, reduce taxes paid or accrued          Boycott Report, and attach all
1116 (as explained on page 1), the           by any taxes attributable to excluded        supporting schedules. In addition, you
following rules apply.                       income from sources in American              must reduce either the total taxes
• You cannot carry over unused               Samoa. For more information, see Pub.        available for credit or the credit
foreign taxes paid or accrued in a year      570.                                         otherwise allowable by your foreign
to which the election does not apply to      • Taxes on foreign-oil-related               taxes resulting from boycott activities. If
any year for which you made the              income. Reduce taxes paid or accrued         you can figure the taxes specifically
election.                                    by foreign taxes paid or accrued on          attributable to boycott operations, enter
• The carryback-carryforward period is       foreign-oil-related income, but only to      the amount on line 12. If you cannot
not extended if you are unable to use a      the extent the tax imposed by the            figure the amount of taxes specifically
carryback or carryforward because you        foreign country on the oil-related           attributable to boycott operations,
made the election.                           income is considered to be materially        multiply the credit otherwise allowable
• Do not reduce the carryback or             greater than the tax generally imposed       by the international boycott factor
carryforward by the amount you would         by that country on other kinds of            (figured on Schedule A (Form 5713),
have used in the election year if you        income. See Regulations section              International Boycott Factor) and enter
had not made the election.                   1.907(b)-1. The amount of tax not            the result on Form 1116, line 32 .
    File Form 1040X or other amended         allowed as a credit under this rule is       Attach a statement to Form 1116
return and a revised Form 1116 for the       allowed as a business expense                showing in detail how you figured the
earlier tax year to which you are            deduction.                                   reduction.
carrying back excess foreign taxes.          • Taxes on foreign oil and gas                   For more information, see Form
    Special rules apply to the carryback     extraction income. Reduce taxes paid         5713 and its instructions.
and carryforward of foreign taxes paid       or accrued by taxes imposed on foreign
or accrued on foreign oil and gas            oil and gas extraction income. The           Line 14
extraction income. See section 907(f).       amount of the reduction is the amount        The amount on line 14 is your taxable
                                             by which your foreign oil and gas            income (or loss), before adjustments,
    See Pub. 514 for more information        extraction taxes exceed the amount of        from sources outside the United States.
on carryback and carryforward                your foreign oil and gas extraction          If the amount on line 14 is zero or a
provisions, including examples.              income for the year multiplied by a          loss, you generally have no foreign tax
Line 12                                      fraction equal to your pre-credit U.S. tax   credit for the category of income
                                             liability (for example, Form 1040, line      checked above Part I of this Form
You may have to reduce the foreign           44) divided by your worldwide income.        1116. However, you must complete line
taxes you paid or accrued by the             You may be entitled to carry over to         15 and continue with the form even if
following items.                             other years taxes reduced under this         line 14 is zero or a loss.
• Taxes on income excluded on                rule. See section 907(f).
Form 2555 or Form 2555-EZ. Reduce            • Taxes on foreign mineral income.           Line 15
taxes paid or accrued by the taxes           Reduce taxes paid or accrued on              You are required to increase or
allocable to any foreign earned income       mineral income from a foreign country        decrease the amount on line 14 by the
excluded on Form 2555 or Form                or U.S. possession if you took a             following adjustments. The adjustments
2555-EZ. If only part of your foreign        deduction for percentage depletion           must be made in the order listed. If you
earned income is excluded, you must          under section 613 for any part of the        have more than one adjustment, enter
determine the amount of tax allocable        mineral income.                              the net adjustment on line 15 and
to excluded income. To do so, multiply       • Reduction for failure to file Form         attach a detailed statement showing
the foreign taxes paid or accrued on         5471. U.S. shareholders who control a        your computation. See Pub. 514 for
foreign earned income received or            foreign corporation must file Form

                                                               -15-
more details on each of these                  2. Recapture of prior year overall       part of any income you receive in 2006
adjustments.                                foreign loss. If you had an overall         in that loss category. You
    The adjustments are:                    foreign loss in a prior year that offset    recharacterize the income by:
    1. Allocation of foreign losses. If     U.S. source income, a part of your          • Increasing the amount on line 14
you have a loss on line 14 of one Form      foreign income (in the same category        (adjusted by any of the other
1116 and you have income on line 14         as the loss) is treated as U.S. source      adjustments previously mentioned in
of one or more other Forms 1116, you        income in each following tax year. The      these line 15 instructions) of the Form
must reduce the foreign income by a         part that is treated as U.S. source         1116 for each of the separate
pro rata share of the loss before you       income is the smallest of:                  categories, other than the loss
use any remaining loss to reduce U.S.          a. The amount of overall foreign         category, previously reduced by
source income.                              loss not recaptured in earlier years,       including on line 15 any recharacterized
                                               b. 50% (or more, if you choose) of       income and
    If the loss reduces foreign source      your taxable income from foreign            • Decreasing the amount on line 14
income, you must recharacterize the         sources, or                                 (adjusted by any of the other
income you receive in the loss category         c. The amount from line 14, less        adjustments previously mentioned in
in later years. See Recharacterization      any adjustment for allocation of losses     these line 15 instructions) of the Form
of income on this page. In situations       from other categories, as described         1116 for the loss category by including
where the loss to be allocated exceeds      under Allocation of foreign losses on       on line 15 the amount of
foreign income in other categories, the     page 15.                                    recharacterized income as a negative
excess reduces U.S. source income (as          Reduce the income on line 14 by          number (in parentheses).
modified below under Capital losses)        including (in parentheses) on line 15            Example. Using the facts in the
and for later years you must follow the     the smallest of a, b, or c above. This is   example under Allocation of foreign
rules described under Recapture of          the amount of the recapture. Be sure to     losses on this page, in the next year
prior year overall foreign loss on this     attach your computation. If you elect to    (2007), you have $5,000 of general
page.                                       recapture more of an overall foreign        limitation income, $3,000 of passive
   Capital losses. In determining your      loss than is required (b above), show in    income, and $500 of high withholding
U.S. source income, reduce the amount       your computation the percentage of          tax interest. Because $1,600 of the
of any capital losses from U.S. sources     taxable income recaptured and the           general limitation loss was used to
by the amount you entered on line 4 of      dollar amount of the recapture.             reduce your passive income in 2006,
Worksheet A or line 5 of the Line 2                                                     $1,600 of your 2007 general limitation
Worksheet for Worksheet B. If you have           Dispositions of certain property.      income must be recharacterized as
capital losses from U.S. sources and        If you recognized foreign source gain in    passive income. Similarly, $400 of the
you did not use either Worksheet A or       the same category as the overall            general limitation income must be
Worksheet B, see Pub. 514 to                foreign loss on a disposition of property   recharacterized as high withholding tax
determine your U.S. source income.          that was used predominantly in a            interest. On your 2007 Form 1116 for
    Example. For 2006, you completed        foreign trade or business and that          passive income, you would include
three Forms 1116. The first had a loss      generated foreign source income in the      $1,600 on line 15. On your 2007 Form
from general limitation income of           same category as the overall foreign        1116 for high withholding tax interest,
$2,000 on line 14, the second had           loss, then the gain on the disposition      you would include $400 on line 15. On
income of $4,000 from passive sources       may be subject to recapture as U.S.         your 2007 Form 1116 for general
on line 14, and the third had income of     source income to the extent of 100% of      limitation income, you would include
$1,000 from high withholding tax            your foreign source taxable income.         ($2,000) on line 15.
interest on line 14. You must allocate      See section 904(f)(3).
the $2,000 loss between the passive              The above rule also generally                    Recharacterizing income from a
                                                                                          TIP separate category does not
income and the high withholding tax         applies to a gain on the disposition of               result in recharacterizing any
interest in the same proportion as each     stock in a controlled foreign corporation   tax.
category’s income bears to the total        (CFC), if you owned more than 50
foreign income.                             percent (by vote or value) of the stock          4. Allocation of U.S. losses. If you
    The amount of the loss that would       right before you disposed of it. See        have a net loss from U.S. sources in
reduce passive income would be 80%          section 904(f)(3)(D) for more               2006, proportionately allocate that loss
($4,000/$5,000) of the $2,000 loss or       information and exceptions.                 among the separate categories of your
$1,600. Include the $1,600 (in                   Reduce line 14 by including (in        foreign income. Reduce the income on
parentheses) on line 15 of the passive      parentheses) on line 15 the smallest of     line 14 (adjusted by any of the other
income Form 1116. Assuming you have         (a) the amount of the gain not              adjustments previously mentioned in
no other line 15 adjustments, enter         recaptured under the two preceding          these line 15 instructions) by including
$2,400 ($4,000 − $1,600) on line 16 of      paragraphs, (b) the remaining amount        (in parentheses) on line 15 the
that form.                                  of the overall foreign loss not             allocable portion of any U.S. loss. A
                                            recaptured in earlier years or in the       U.S. loss includes a rental loss on
    The amount of the loss that would                                                   property located in the United States. If
reduce high withholding tax interest        current year under the two preceding        you have any qualified dividends or
would be 20% ($1,000/$5,000) of the         paragraphs, or (c) the amount from line     capital gains (including capital gain
$2,000 loss or $400. Include the $400       14, less any adjustment for allocation of   distributions) or losses for the taxable
in parentheses on line 15 of the high       losses from other categories and any        year and you are required to make any
withholding tax interest Form 1116.         adjustment under the two preceding          adjustments to those amounts, as
Assuming you have no other line 15          paragraphs. See Pub. 514 if you             explained earlier under Foreign
adjustments, enter $600 ($1,000 −           disposed of property described above        Qualified Dividends and Capital Gains
$400) on line 16 of that form.              and you recognized foreign source gain      (Losses) starting on page 5 or the
    In this case, all of the $2,000 loss    in a different category than the overall    instructions for line 17, the amount of
was allocated between the foreign           foreign loss, you recognized U.S.           your U.S. loss is the excess of:
source passive income and the high          source gain, or you did not recognize
                                            gain.                                            1. The total of the amounts entered
withholding tax interest categories, and                                                on line 14 for each Form 1116 you are
no reduction was made to U.S. source             Attach a statement to Form 1116        filing, over
income.                                     showing the balance in each separate             2. The amount entered on line 17 of
    If you receive general limitation       limitation overall foreign loss account.    the Form 1116.
income in a later year, you must            See Regulations section 1.904(f)-1(b)
                                            for more information.
recharacterize all or part of that income
                                                 3. Recharacterization of income.       Line 17
as passive income and high withholding                                                  If you have qualified dividends or
tax interest in that later year. See the    If, in a prior tax year, you reduced your
                                            foreign taxable income in the category      capital gains, you may be required to
example under Recharacterization of                                                     make adjustments to those qualified
income on this page.                        checked above Part I by a pro rata
                                            share of a loss from another category,      dividends and gains before you take
                                            you must recharacterize in 2006 all or      those amounts into account on line 17.

                                                              -16-
Also, individuals have to adjust their                       1. Line 7 of the Qualified Dividends                  • Line 12 of the Qualified Dividends
taxable income before exemptions if                       and Capital Gain Tax Worksheet does                      and Capital Gain Tax Worksheet in the
they file Form 8914, Exemption Amount                     not exceed:                                              Form 1040NR instructions.
for Taxpayers Housing Individuals                            • $188,450 if married filing jointly or                  Complete all other lines as instructed
Displaced by Hurricane Katrina.                           qualifying widow(er);                                    on the worksheet.
Individuals Who Completed a                                  • $94,225 if married filing
                                                          separately;                                              Estates and Trusts That
Qualified Dividends and Capital                              • $154,800 if single; or                              Completed a Qualified
Gain Tax Worksheet                                           • $171,650 if head of household.                      Dividends Tax Worksheet or
If you completed the Qualified                               2. The amount of your foreign                         Schedule D
Dividends and Capital Gain Tax                            source net capital gain, plus the                        If you completed the Qualified
Worksheet in the instructions for your                    amount of your foreign source qualified                  Dividends Tax Worksheet in the
tax return, you must use the Worksheet                    dividends is less than $20,000. For this                 instructions for Form 1041 or you
for Line 17 on this page to figure the                    purpose, ignore any capital gain                         completed Part V of Schedule D (Form
amount to enter on line 17 if:                            distributions or qualified dividends you                 1041), you must use the Worksheet for
    1. You file Form 1040 and                             elected to include on Form 4952, line                    Line 17 on this page to figure the
    a. Line 7 of your Qualified Dividends                 4g.                                                      amount to enter on line 17 if:
and Capital Gain Tax Worksheet is                             Adjustment exception for Form                            1. You figured your tax using the
greater than zero, and                                    1040NR filers. You qualify for the                       Qualified Dividends Tax Worksheet,
    b. Line 17 of your Qualified                          adjustment exception if you meet both                    line 5 of that worksheet is greater than
Dividends and Capital Gain Tax                            of the following requirements:                           zero, and line 15 of your Qualified
Worksheet is less than line 18 of that                        1. Line 5 of the Qualified Dividends                 Dividends Tax Worksheet is less than
worksheet, OR                                             and Capital Gain Tax Worksheet does                      line 16 of that worksheet, or
    2. You file Form 1040NR and                           not exceed:                                                  2. You figured your tax using the
    a. Line 5 of your Qualified Dividends                     a. $188,450 if you checked filing                    Part V of Schedule D (Form 1041), line
and Capital Gain Tax Worksheet is                         status box 6,                                            23 of the Schedule D is greater than
greater than zero, and                                        b. $94,225 if you checked filing                     zero, and line 33 of the Schedule D is
    b. Line 15 of your Qualified                          status box 3,4, or 5, or                                 less than line 34.
Dividends and Capital Gain Tax                                c. $154,800 if you checked filing                    Adjustment exception. If you qualify
Worksheet is less than line 16 of that                    status box 1 or 2.                                       for the adjustment exception, you do
worksheet.                                                    2. The amount of your foreign                        not need to use the Worksheet for Line
Adjustment exception. If you qualify                      source net capital gain, plus the                        17 to figure the amount to enter on line
for the adjustment exception, you do                      amount of your foreign source qualified                  17. You qualify for the adjustment
not need to use the worksheet for line                    dividends is less than $20,000.                          exception if:
17 to figure the amounts to enter on                                                                                   1. Line 5 of the Qualified Dividends
line 17.                                                            Your foreign source net capital                Tax Worksheet or line 23 of Schedule
                                                            TIP gain is the excess of your                         D (Form 1041) does not exceed
    If you do not need to complete the                            foreign source net long-term
Worksheet for Line 17, enter on line 17                                                                            $7,400, and
of Form 1116 your taxable income                          capital gain over your foreign source                        2. The amount of your foreign
without the deduction for your                            net short-term capital loss.                             source net capital gain, plus the
exemption (for example, the amount                        Completing the Worksheet for                             amount of your foreign source qualified
from Form 1040, line 41), minus any                       Line 17. If you do need to complete                      dividends, is less than $20,000. For this
amount shown on Form 8914, line 6.                        the Worksheet for Line 17, do the                        purpose, ignore any foreign source
    Adjustment exception for Form                         following.                                               qualified dividends or capital gains that
1040 filers. You qualify for the                              Lines 2 through 5. Skip these lines.                 you elected to include on Form 4952,
adjustment exception if you meet both                         Line 6. Enter the amount from:                       line 4g.
of the following requirements:                            • Line 14 of the Qualified Dividends
                                                          and Capital Gain Tax Worksheet in the
                                                          Form 1040 instructions, or


Worksheet for Line 17 (Worldwide Qualified Dividends and Capital Gains)                                                                 Keep for Your Records

Caution: See the instructions for Line 17 beginning on page 16 before starting this worksheet.
 1. Individuals: Enter the amount from Form 1040, line 41 (minus any amount on Form 8914, line 6).
    If you are a nonresident alien, enter the amount from Form 1040NR, line 38 (minus any amount
    on Form 8914, line 6).
    Estates and trusts: Enter taxable income without the deduction for your exemption . . . . . . . . . .                                     1.
 2. Enter your worldwide 28% gains (see instructions) . . . . . . . . . . . . . . .                         2.
 3. Multiply line 2 by 0.2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         3.
 4. Enter your worldwide 25% gains (see instructions) . . . . . . . . . . . . . . .                         4.
 5. Multiply line 4 by 0.2857 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         5.
 6. Enter your worldwide 15% gains and qualified dividends (see
    instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6.
 7. Multiply line 6 by 0.5714 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           7.
 8. Add lines 3, 5, and 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   8.
 9. Subtract line 8 from line 1. Enter the result here and on Form 1116, line 17 . . . . . . . . . . . . . . . . .                            9.



                                                                                   -17-
        Your foreign source net capital       exemption (for example, the amount          figured on all of your Forms 1116.
 TIP gain is the excess of your               from Form 1040, line 41), minus any         However, if you completed a Form
         foreign source net long-term         amount shown on Form 8914, line 6.          1116 for category g (lump-sum
capital gain over your foreign source            If you do need to complete the           distributions) or h (section 901(j)
net short-term capital loss.                  Worksheet for Line 17, do the following.    income), do not use Part IV of that
    If you do not need to complete the           Line 2. Enter the amount (if any)        Form 1116 as your summary. Enter the
Worksheet for Line 17, enter on line 17       from line 32 of the Schedule D Tax          credits from line 21 of all of your Forms
of Form 1116 the estate’s or trust’s          Worksheet.                                  1116 on lines 22 through 29 of the
taxable income without the deduction                                                      Form 1116 you are using to summarize
                                                 Line 4. Enter the amount (if any)        your credits. File the other Forms 1116
for its exemption.                            from line 29 of the Schedule D Tax
Completing the Worksheet for                                                              as attachments.
                                              Worksheet.
Line 17. If you do need to complete              Line 6. Enter the amount (if any)        Line 31
the Worksheet for Line 17, do the             from line 23 of the Schedule D Tax          Enter the smaller of line 19 or line 30.
following.                                    Worksheet.
    Lines 2 through 5. Skip these lines.                                                  Note. Generally, line 30 will exceed
                                                 Complete all other lines as instructed   line 19 only if you have U.S. capital
    Line 6. Enter the amount from line        on the worksheet.                           gains or qualified dividends that are
12 of the Qualified Dividends Tax                                                         subject to the capital gain rate
Worksheet or line 30 of Schedule D.           Line 19                                     differential (figured in the Worksheet for
    Complete all other lines as instructed    If you are completing line 19 for           Line 17 on page 17).
on the worksheet.                             separate category g (lump-sum
                                              distributions), enter the amount from       Paperwork Reduction Act Notice.
Taxpayers Who Completed the                   line 5 of the Worksheet for Lump-Sum        We ask for the information on this form
Schedule D Tax Worksheet                      Distributions on page 4.                    to carry out the Internal Revenue laws
 If you figured your tax using the                Do not complete line 19 for separate    of the United States. You are required
Schedule D Tax Worksheet (in the              category h (section 901(j) income). See     to give us the information. We need it to
Schedule D (Form 1040) instructions or        page 3.                                     ensure that you are complying with
in the Form 1041 instructions), you                                                       these laws and to allow us to figure and
must use the Worksheet for Line 17 on             For all other applicable categories,    collect the right amount of tax.
page 17 to figure the amount of tax to        complete line 19 as follows.
                                              Form 1040 filers. Enter the amount              You are not required to provide the
enter on line 17 of Form 1116 if:                                                         information requested on a form that is
• Line 17 of the Schedule D Tax               from Form 1040, line 44, less any tax       subject to the Paperwork Reduction Act
Worksheet is greater than zero, and           included on line 44 from Form 4972.         unless the form displays a valid OMB
• Line 35 of the Schedule D Tax               Form 1040NR filers. Enter the amount        control number. Books or records
Worksheet is less than line 36.               from Form 1040NR, line 41, less any         relating to a form or its instructions
Adjustment exception. If you qualify          tax included on line 41 from Form 4972.     must be retained as long as their
for the adjustment exception, you do          Form 1041 filers. Enter the amount          contents may become material in the
not need to use the Worksheet for Line        from Form 1041, Schedule G, line 1a.        administration of any Internal Revenue
17 to figure the amount to enter on line                                                  law. Generally, tax returns and return
17. You qualify for the adjustment            Line 21                                     information are confidential, as required
exception if:                                 The maximum foreign tax credit you          by section 6103.
    1. The amount of your foreign             can claim in the current year is                The time needed to complete and
source qualified dividends plus the           generally limited to the allocated          file this form will vary depending on
amount of your foreign source net             amount of U.S. tax imposed on the           individual circumstances. The
capital gain is less than $20,000, and        foreign income, or the actual amount of     estimated burden for individual
    2. Line 17 of the Schedule D Tax          foreign tax paid or accrued on the          taxpayers filing this form is approved
Worksheet (Form 1040) is less than or         foreign income (after reductions            under OMB control number 1545 – 0074
equal to:                                     required on line 12), whichever is less.    and is included in the estimates shown
                                              However, see Foreign Taxes Eligible
• $188,450 if married filing jointly or       for a Credit on page 2 for additional
                                                                                          in the instructions for their individual
qualifying widow(er);                                                                     income tax return. The estimated
                                              information.
• $94,225 if married filing separately;                                                   burden for all other taxpayers who file
• $154,800 if single; or                         If the amount on line 20 is smaller      this form is: Recordkeeping, 2 hr., 43
• $171,650 if head of household               than the amount on line 13, see
                                              Pub. 514 for more information on
                                                                                          min.; Learning about the law or the
(or, for trusts and estates, line 17 of the                                               form, 1 hr., 5 min.; Preparing the
Schedule D Tax Worksheet (Form                carryback and carryforward provisions,      form, 2 hr., 39 min.; Copying,
1041) is less than or equal to $7,400).       including examples.                         assembling, and sending the form to
                                                                                          the IRS,
         Your foreign source net capital                                                  34 min.
  TIP gain is the excess of your              Part IV—Summary of
         foreign source net long-term                                                         If you have comments concerning
capital gain over your foreign source         Credits From Separate                       the accuracy of these time estimates or
net short-term capital loss. Ignore any                                                   suggestions for making this form
foreign source qualified dividends or         Parts III                                   simpler, we would be happy to hear
capital gains that you elected to include     Complete lines 22 through 29 in             from you. You can write to the IRS at
on Form 4952, line 4g, in determining         Part IV only if you must complete more      the address listed in the instructions of
the amount of your foreign source             than one Form 1116 because you have         the tax return with which this form is
qualified dividends and net capital gain.     more than one of the categories of          filed.
    If you do not need to complete the        income listed above Part I.
Worksheet for Line 17, enter on line 17          Complete Part IV on only one Form
of Form 1116 your taxable income              1116 to summarize the credits you
without the deduction for your




                                                                -18-

								
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