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Pub. 514, Foreign Tax Credit for Individuals 2005 Tax Year

Publication 514 - Introductory Material


What's New for 2005

Rate of exchange for foreign taxes. If you claim the credit for foreign taxes on an accrual basis, you must generally use the average exchange rate for the tax year to which taxes relate. However in tax years beginning in 2005 and later years, you can elect to use the exchange rate in effect on the date the taxes are paid if the foreign tax liability is denominated in a nonfunctional currency. See Foreign Currency and Exchange Rates.

Source of compensation for labor or personal services. In tax years beginning after July 13, 2005, new rules apply in determining the source of compensation for labor or personal services performed as an employee. If you file your tax returns on a calendar year basis, the new rules apply to your returns for 2006 and later years. Under the new rules, compensation (other than fringe benefits) is sourced on a time basis. Fringe benefits (such as housing and education are sourced on a geographical basis. For more information, see Regulations section 1.861-4.

Reminders

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.

Introduction

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:

  • How to choose to take the credit or the deduction,

  • Who can take the credit,

  • What foreign taxes qualify for the credit,

  • How to figure the credit, and

  • How to carry over unused foreign taxes to other tax years.

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.

Comments and suggestions.   We welcome your comments about this publication and your suggestions for future editions.

  You can write to us at the following address:


Internal Revenue Service
Individual Forms and Publications Branch
SE:W:CAR:MP:T:I
1111 Constitution Ave. NW, IR-6406
Washington, DC 20224

  We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

  You can email us at *taxforms@irs.gov. (The asterisk must be included in the address.) Please put “Publications Comment” on the subject line. Although we cannot respond individually to each email, we do appreciate your feedback and will consider your comments as we revise our tax products.

Tax questions.   If you have a tax question, visit www.irs.gov or call 1-800-829-1040. We cannot answer tax questions at either of the addresses listed above.

Ordering forms and publications.   Visit www.irs.gov/formspubs to download forms and publications, call 1-800-829-3676, or write to the National Distribution Center at the address shown under How To Get Tax Help in the back of this publication.

Useful Items - You may want to see:

Publication

  • 54 Tax Guide for U.S. Citizens and Resident Aliens Abroad

  • 519 U.S. Tax Guide for Aliens

  • 570 Tax Guide for Individuals With Income From U.S. Possessions

Form (and Instruction)

  • 1116
    Foreign Tax Credit

See How To Get Tax Help near the end of this publication for information about getting these publications and this form.

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