Income categories eliminated. The following categories of income have been eliminated for purposes of computing the foreign tax credit limit. Income that previously fell in these categories is either passive category income or general category income.

High withholding tax interest and shipping income are passive category income or general category income depending on the circumstances. Financial services income is general category income if you are predominantly engaged in the active conduct of a banking, insurance, financing or similar business. Dividends from a DISC or former DISC, and certain distributions from a former FSC, are passive category income. See Separate Limit Income under How To Figure the Credit.

Carryforward and carryback of unused foreign taxes. Special rules apply to carrybacks of unused foreign taxes to 2006 and carryforwards of unused foreign taxes to 2007 and later years. See Special rules for carryforwards and carrybacks of pre-2007 and post-2006 unused foreign taxes under Carryback and Carryover.

Recharacterization of overall domestic loss. If you have an overall domestic loss for any tax year beginning after 2006, you must recharacterize a portion of your U.S. source taxable income in succeeding years as foreign source taxable income for purposes of the foreign tax credit. In a tax year you choose to claim the foreign tax credit, the overall domestic loss is the domestic loss for that tax year to the extent it offsets foreign source taxable income for that tax year or for any preceding tax year (in which you chose to claim the foreign tax credit) because of a carryback. If you do not choose to claim the foreign tax credit for a tax year, the overall domestic loss is the domestic loss for that tax year to the extent it offsets foreign source taxable income for any preceding tax year (in which you chose to claim the foreign tax credit) because of a carryback. A domestic loss is the amount by which the U.S. source gross income for the tax year is exceeded by the sum of the deductions properly allocated or apportioned to the income (determined without regard to any carryback from a subsequent tax year). For more information, see Internal Revenue Code section 904(g).

Country-by-country reporting no longer required of mutual fund or other regulated investment company (RIC) shareholders.  If you claim a foreign tax credit in 2007 or later years on your share of the foreign taxes paid by a mutual fund or other RIC, you no longer have to report the income or taxes paid on a country-by-country basis on Form 1116. See the Instructions for Form 1116, line g.

Foreign tax redetermination. There are new rules for notifying the IRS of a foreign tax redetermination, which is a change in your foreign tax liability that may affect your foreign tax credit. See Foreign Tax Redetermination.

Ordering rules for adjustments to taxable income or loss. The ordering rules for allocating foreign losses and U.S. losses among the separate income categories have changed. See Allocation of Foreign and U.S. Losses.

Change of address. If your address changes from the address shown on your last return, use Form 8822, Change of Address, to notify the Internal Revenue Service.

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

If you paid or accrued foreign taxes to a foreign country on foreign source income and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes. Taken as a deduction, foreign income taxes reduce your U.S. taxable income. Taken as a credit, foreign income taxes reduce your U.S. tax liability.

In most cases, it is to your advantage to take foreign income taxes as a tax credit. The major scope of this publication is the foreign tax credit.

The publication discusses:

Unless you choose not to be subject to the foreign tax credit limit, you claim the credit by filing Form 1116 with your U.S. income tax return. Two examples with filled-in Forms 1116 are provided at the end of this publication.