Holding period for claiming a credit for taxes withheld on dividends. The period in which you must hold the stock at least 16 days has changed to a 31-day period. For preferred stock, the period in which you must hold the stock at least 46 days has changed to a 91-day period. These changes apply to dividends paid after September 4, 1997. For more information, see Taxes Imposed on Certain Dividends.

Credit for foreign taxes withheld on income or gain. You cannot claim a credit for foreign taxes withheld on income or gain (other than dividends) from certain property. This rule applies to income or gain paid or accrued after November 21, 2004. For more information, see Taxes Withheld on Income or Gain (Other Than Dividends) under Taxes for Which You Can Only Take an Itemized Deduction.

Carryback and carryover. Unused foreign taxes arising in tax years beginning after October 22, 2004 can be carried back 1 year and forward 10 years. In addition, the carryforward period has been extended from 5 years to 10 years for unused foreign taxes that could be carried forward under the 5-year rule of prior law to tax years ending after October 22, 2004. See Carryback and Carryover.

Disposition of stock in a controlled foreign corporation (CFC). If you dispose of stock in a CFC at a gain after October 22, 2004, the gain may be subject to recapture as U.S. source income. See Recapture of Foreign Losses.

Gifts to charity. Do not apportion to your foreign source gross income any deduction for charitable contributions you made after July 27, 2004. You can elect to also apply this rule to charitable contributions made before July 28, 2004, but only for the tax year ending after July 27, 2004. See Deductions not definitely related under Determining Taxable Income From Sources Outside the United States.

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 after 2004, you can elect not to use the average exchange rate for any foreign taxes for which the foreign tax liability is denominated in a currency other than your functional currency. If you make this election, use the exchange rate in effect on the date you paid the taxes. This election is effective for the year you make it and all subsequent years unless you revoke it with IRS consent.

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.