Publication 514 |
2000 Tax Year |
Choosing To Take Credit or Deduction
You can choose each tax year to take the amount of any qualified
foreign taxes paid or accrued during the year as a foreign tax credit
or as an itemized deduction. You can change your choice for each
year's taxes.
To choose the foreign tax credit, you generally must complete Form
1116 and attach it to your U.S. tax return. However, you may qualify
for an exception that allows you to claim the foreign tax credit
without using Form 1116. See How To Figure the Credit,
later. To choose to claim the taxes as an itemized deduction,
use Schedule A (Form 1040), Itemized Deductions.
Figure your tax both ways--claiming the credit and claiming
the deduction. Then fill out your return the way that benefits you
most. See Why Choose the Credit, later.
Choice Applies to All
Qualified Foreign Taxes
As a general rule, you must choose to take either a credit or a
deduction for all qualified foreign taxes.
If you choose to take a credit for qualified foreign taxes, you
must take the credit for all of them. You cannot deduct any of them.
Conversely, if you choose to deduct qualified foreign taxes, you must
deduct all of them. You cannot take a credit for any of them.
See What Foreign Taxes Qualify for the Credit, later,
for the meaning of qualified foreign taxes.
There are exceptions to this general rule, which are described
next.
Exceptions for foreign taxes not allowed as a credit.
Even if you claim a credit for other foreign taxes, you can deduct
any foreign tax that is not allowed as a credit if:
- You participated in or cooperated with an international
boycott (discussed later under Taxes From International Boycott
Operations),
- You paid the tax to a country for which a credit is not
allowed because it provides support for acts of international
terrorism, or because the United States does not have diplomatic
relations with it or recognize its government, or
- You paid withholding tax on dividends from foreign
corporations whose stock you did not hold for the required period of
time.
For more information on items (2) and (3), see the discussion later
under Foreign Taxes for Which You Cannot Take a Credit.
Foreign taxes that are not income taxes.
Generally, only foreign income taxes qualify for the foreign tax
credit. Other taxes, such as foreign real and personal property taxes,
do not qualify. But you may be able to deduct these other taxes even
if you claim the foreign tax credit for foreign income taxes.
You generally can deduct these other taxes only if they are
expenses incurred in a trade or business or in the production of
income. However, you can deduct foreign real property taxes that are
not trade or business expenses as an itemized deduction on Schedule A
(Form 1040).
Carrybacks and carryovers.
There is a limit on the credit you can claim in a tax year. If your
qualified foreign taxes exceed the credit limit, you may be able to
carry over or carry back the excess to another tax year. If you deduct
qualified foreign taxes in a tax year, you cannot use a carryback or
carryover in that year. That is because you cannot take both a
deduction and a credit for qualified foreign taxes in the same tax
year.
For more information on the limit, see How To Figure the
Credit, later. For more information on carrybacks and
carryovers, see Carryback and Carryover, later.
Making or Changing
Your Choice
You can make or change your choice to claim a deduction or credit
at any time during the period within 10 years from the due
date for filing the return for the tax year for which you make the
claim. You make or change your choice on your tax return (or on an
amended return) for the year your choice is to be effective.
Example.
You paid foreign taxes for the last 13 years and chose to deduct
them on your U.S. income tax returns. You were timely in both filing
your returns and paying your U.S. tax liability. In February 2000 you
file an amended return for tax year 1989 choosing to take a credit for
your 1989 foreign taxes because you now realize that the credit is
more advantageous than the deduction for that year. Because your
return for 1989 was not due until April 16, 1990, this choice is
timely (within 10 years).
Because there is a limit on the credit for your 1989 foreign tax,
you have unused 1989 foreign taxes. Ordinarily, you first carry back
unused foreign taxes and claim them as a credit in the 2 preceding tax
years. If you are unable to claim all of them in those 2 years, you
carry them forward to the 5 years following the year in which they
arose.
Because you originally chose to deduct your foreign taxes and the
10-year period for changing the choice for 1987 and 1988 has passed,
you cannot carry the unused 1989 foreign taxes back to tax years 1987
and 1988.
Because the 10-year periods have not passed for your 1990 through
1994 income tax returns, you can still choose to carry forward
any unused 1989 foreign taxes. However, you must reduce the unused
1989 foreign taxes that you carry forward by the amount that would
have been allowed as a carryback if you had timely carried back the
foreign tax to tax years 1987 and 1988.
You cannot take a credit or a deduction for foreign taxes paid on
income you exclude under the foreign earned income exclusion or the
foreign housing exclusion.
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