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 were paid. For details, see Publication 514, Foreign Tax Credit for Individuals.

Beginning in 2005, you generally can use your entire alternative minimum tax foreign tax credit to reduce your pre-credit tentative minimum tax. For tax years beginning before 2005, the amount of alternative minimum tax foreign tax credit was generally limited to 90% of your pre-credit tentative minimum tax. See Form 6251 and its instructions.

The extraterritorial income (ETI) exclusion provisions are being phased out, generally for transactions after 2004. For transactions during 2005, taxpayers may claim 80% of the otherwise applicable ETI exclusion. The phaseout of the ETI exclusion provisions does not apply to transactions in the ordinary course of a trade or business under a binding contract if such contract is between the taxpayer and an unrelated person (as defined under the ETI exclusion provisions) and such contract is in effect on September 17, 2003, and at all times thereafter.

For more information, see the 2005 Form 8873, Extraterritorial Income Exclusion, and instructions.

Beginning in 2005, if you are a nonresident alien and a resident of Japan, you generally cannot claim the following benefits. The new U.S.-Japan income tax treaty, which became effective on January 1, 2005, does not allow them.

However, if you choose to have the old U.S.-Japan treaty apply in its entirety for 2005, you may be able to claim these benefits on your 2005 Form 1040NR, U.S. Nonresident Alien Income Tax Return.

For partnership tax years beginning after May 18, 2005, new regulations under section 1446 provide the rules for a partnership to withhold tax on ECI allocated to a foreign partner. See Partnership Withholding on Effectively Connected Income in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entries.

For partnership tax years beginning after May 18, 2005, a PTP can no longer elect to withhold tax based on ECI allocable to its foreign partners. The PTP must withhold on the distribution of that income to its foreign partners.

For more information, see Publicly Traded Partnerships under Partnership Withholding on Effectively Connected Income in Publication 515.

Generally, the requirement to file a return has been eliminated for nonresident aliens who earn wages effectively connected with a U.S. trade or business that are less than the amount of one personal exemption ($3,300 for 2006). For more information, see Notice 2005-77, 2005-46 I.R.B. 951. You can find Notice 2005-77 on page 951 of Internal Revenue Bulletin 2005-46 at www.irs.gov/pub/irs-irbs/irb05-46.pdf.

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 on page 429 of Internal Revenue Bulletin 2005-35 at www.irs.gov/pub/irs-irbs/irb05-35.pdf.

The extraterritorial income (ETI) exclusion provisions are being phased out, generally for transactions after 2004. For transactions during 2006, taxpayers may claim 60% of the otherwise applicable ETI exclusion. The phaseout of the ETI exclusion provisions does not apply to transactions in the ordinary course of a trade or business under a binding contract if such contract is between the taxpayer and an unrelated person (as defined under the ETI exclusion provisions) and such contract is in effect on September 17, 2003, and at all times thereafter.

For more information, see the 2005 Form 8873 and instructions.

New rules apply to acceptance agents. There are four major changes to the rules.

For more information, see Rev. Proc. 2006-10 on page 293 of Internal Revenue Bulletin 2006-2 at www.irs.gov/pub/irs-irbs/irb06-02.pdf.