ABCs of Foreign Tax Credit for individuals - YouTube video script

Hello, everyone, and welcome to today's webinar, The ABCs of Foreign Tax Credit for Individuals. I see it's the top of the hour. We're glad that you've joined us today. My name is Anika Pompey, and I'm a Senior Stakeholder Liaison with the Internal Revenue Service.

I will be your moderator for today's webinar, which is slated for approximately a 120 minutes. This webinar offers two IRS continuing education credits. Participants earn two IRS continuing education credits and a related certificate of completion by attending the live broadcast of the webinar for at least 100 minutes after the official top of the hour start time, and at least, answering at least four polling questions on the live broadcast. The polling question example to test your pop-up blocker will count as an attendance check towards the polling questions response requirement.

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So here's your question. Do you know who your local Stakeholder Liaison is? Answer A for yes; B for no; or C for what is a Stakeholder Liaison? Now take a moment and click the radio button that corresponds to your answer, and I'm going to reread that question. Do you know who your local Stakeholder Liaison is? Answer a. for yes; b. for no; or c. what is a Stakeholder Liaison? I'm going to give you a few more seconds to make your selection.

Okay. So we're going to stop the polling now, and let's see how the majority of you responded. Okay. So I see that the majority of you responded, yes. So that's really good. So better results than past webinars. But for those of you who have selected b. or c. I do encourage you to visit IRS.gov and enter a Stakeholder Liaison in the search bar. You should see a link for Stakeholder Liaison local contacts, and that should take you to our page to learn more about our role as a collaborative outreach champion and how to reach your local Stakeholder Liaison.

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Now, again, I want to welcome you all. We are glad that you joined us for today's webinar. But before we move along with our session, I just want to make sure you all are in the right place. Today's webinar is The ABCs of Foreign Tax Credit for Individuals. This webinar is scheduled for approximately 120 minutes from the top of the hour.

All right. So now I want to introduce you all to our distinguished panel of speakers. We have Jim Wu, Mary Ann Picinic, and Loretta Henry who are all Senior Revenue Agents in the Large Business and International Business Unit. They work specifically in its Withholding Exchange International Individual Compliance division in the Foreign Tax Credit practice network. They are technical specialists with extensive experience focusing on the foreign tax credit for individuals.

Now Jim has been with the IRS for about 15 years. Prior to the IRS, he worked in the private industry for over 20 years, including stints at Deloitte in Church and PricewaterhouseCoopers. Jim is an active CPA with the state of California and has a bachelor's degree in taxation.

Mary Ann has about 23 years of combined experience with the IRS and private industry, almost all of this time in the international tax area. Mary Ann is a current CPA licensed in the state of NY.

And lastly, we have Loretta. She's been with the IRS for just over a year now. But prior to this, she worked at a big four firm specializing in international taxation for inbound and outbound individuals with a financial as a financial planner for a corporate investment bank. Loretta is a licensed CPA in the state of New York.

I'm now going to turn it over to Jim to begin the presentation. Jim, it's all yours.

Well, thank you very much for that introduction. And hello, everyone, and welcome to today's webcast. Our purpose here today is to give a very broad overview of the foreign tax credit or FTC and discuss concepts and ideas that we need to be thinking about when we're working in this tax area. FTC is not just a matter of computation. It has a lot of very complex rules. For example, some questions include, but are not limited to, who is entitled to the credit? When does foreign law control in a credit calculation and when does U.S. law control? What taxes are creditable? Are there international agreements or treaties that decide when foreign law controls the credit calculation? And when is a tax payment voluntary versus compulsory?

So we're going to take a little deep dive into all these questions in our webcast. And so with that, we're going to look at today's topics. But before I dive in, I'm going to start with a couple of trivia questions that relate to our topics today.

So first question is, and you can put your answer if you wish in the text chat. Does anyone know what year the individual income tax was enacted? What year did the individual income tax come into existence? Okay. So the answer to that question is 1913. 1913 is when we started having the individual income tax in the United States.

Now the second question I'm going to ask is, does anyone know when was the foreign tax credit introduced? What year was the foreign tax credit introduced in the U.S.? It wasn't until 1918 when the first predecessor of IRC Section 901 was enacted to allow a foreign tax credit. Now prior to that, from 1913 to 1918, a taxpayer could only deduct foreign income taxes. There was not a credit until 1918.

So now let's take a look at the topics that we will cover today. We're going to talk about some basic concepts. We're going to talk about election of the foreign tax credit, eligibility, who is eligible to claim the foreign tax credit? We're going to talk about the foreign tax credit limitations, categories of income. We're going to discuss sourcing of income and creditability, adjustments to the foreign tax credit, tax treaties. We're going to talk about substantiation, exhaustion of remedies. And we're going to get into timing of the credit and also carryback and carryovers and foreign tax credit redeterminations.

The foreign tax credit or FTC is predicated on three basic principles. The first one is the same income should not be taxed more than once. The second principle is the country in which the income is earned has a primary right to tax that income. And third, the taxpayer's country of residence has a secondary or residual right to tax the income earned in a foreign country.

So now let's take a little deeper dive into these concepts. As we all know, U.S. citizens and U.S. residents often referred to collectively as U.S. persons for tax purposes, are taxed by the U.S. on their worldwide income. It doesn't matter where the taxpayer lives or where the income is earned. Our worldwide system of taxation of income is somewhat unique among the nations. But while working abroad, a U.S. person will often time pay income taxes to the foreign country. The U.S. person will be taxed then also by the U.S. on the same income, resulting in double taxation.

The FTC may significantly alleviate this double taxation on these U.S. persons. Now why do we say significantly alleviate? This is because there are some limitations and requirements that have to be met to qualify for the FTC. The FTC reduces a U.S. taxpayer's tax liability only on that double taxed foreign source income by all or just a part of the foreign income taxes paid or accrued during the tax year. And why do we say all or part? It is because FTC again is subject to a limitation, which we'll talk about in a little bit.

The limitation basically is a lesser of the foreign tax paid or accrued or the U.S. tax on that foreign income. Also, the U.S. only allows a credit for creditable foreign income paid or accrued. So items shown here such as fines, penalties, property taxes, VAT, value added taxes, inheritance, wealth taxes these are not taxes that are creditable for the SEC.

Now I'm going to talk a little bit about the annual election for the FTC. Taxpayers can make an annual election to either claim the foreign tax credit or the taxpayer can choose to deduct the foreign income taxes, but not both. Taxpayers may claim a credit in one year and a deduction in the following year or vice versa. If a taxpayer chooses to deduct, they must do so on the Schedule A itemized deductions.

Generally, a taxpayer must complete a Form 1116 in order to claim the credit. Attaching the Form 1116 to the return constitutes the election of the foreign tax credit. If the taxpayer chooses to take a credit for qualified foreign income taxes, they must take the credit for all the foreign income taxes paid or accrued. The taxpayer cannot take a credit for some foreign income taxes and a deduction for others. If the taxpayer chooses to deduct the foreign income taxes, all the foreign income taxes must be deducted. And if the taxpayer chooses to deduct, the taxpayer must treat any foreign tax credit carryover or carryback as if it was used in that year.

Now we have seen where a taxpayer claimed the foreign income taxes both as a deduction and a credit on the tax return and derive the double benefit. Now this obviously is not allowed. There is an exception to having to attach or file a Form 1116. If the following conditions are met, the taxpayer can claim the foreign tax credit without having to attach the Form 1116. And so these are the four conditions, and they must all be met, but there's exception to apply.

All foreign source income is passive, such as interest income or dividend income. The foreign income tax is withheld at source. All foreign passive income was reported on a qualified pay statement or brokerage statement. And the foreign income tax withheld is not more than $600 for married filing jointly or $300 for all other filing statuses. So if all these four conditions are met, the taxpayer can claim the foreign tax credit without the Form 1116.

Anika, is now a good time for our first polling question?

Yes, Jim. It's a great time for our first polling question. So, yes, it's me, Anika. I'm back. Technology wasn't on my side, but here I am again. And thank you to my backup for stepping in.

So here is our first polling question. Which option completes the sentence? U.S. citizens and resident aliens must pay applicable U.S. taxes on A, all of their income (both U.S. and foreign source) if living in the U.S.; B, only their U.S. source income; C, all of their income (both U.S. and foreign source) regardless of where they live; or D, only their foreign source income.

I want you all to take a moment and click the radio button that best answers the question. If you do not receive the polling question, please enter only the letters a, b, c, or d that corresponds with your response in the ask question text box. Your response is time stamped.

Now, audience, please remember that you do need to answer at least four polling questions and participate in the live broadcast from the official start time for at least 100 minutes to earn two IRS CE credits. The polling question example we did at the beginning of the presentation does count towards the requirement.

And I'm going to give you guys a few more seconds to make your selections or submit your answer in the ask question feature. Okay. So we are going to go ahead and stop the polling now, and let's share the correct answer on the next slide. And the correct response is c. all of their income, both U.S. and foreign source, regardless of where they live. And I see that 80% of you have responded correctly. That is a great response rate.

So, Jim, I'm going to turn it back over to you.

Thank you, Anika. Now so who is eligible to claim the FTC? Well, Section 901(b) defines the categories of taxpayers who are eligible to claim the foreign tax credit. This webinar or webcast focuses on the individual taxpayer. The most common taxpayers you will encounter are U.S. citizens and resident aliens. Both are referred to collectively as U.S. persons.

This includes any person, includes a member of a partnership or a beneficiary of an estate or trust. So let me explain what each category means. The first category of taxpayers eligible to claim the foreign tax credit are U.S. citizens. As I'm sure we're all aware, individual are U.S. citizens simply by being born in The United States. Other individuals may become citizens by complying with certain procedural requirements to become naturalized citizens.

The next category is U.S. residents. U.S. residents are individuals who are not U.S. citizens, but maybe considered resident aliens for U.S. income tax purposes. They are those who possess a Green Card, also known as lawful permanent residence, or those who meet the substantial presence test, or individuals who make a valid election to be treated as resident aliens.

U.S. residents include bona fide residents of Puerto Rico. We're not going to go deep on the residents requirements, but I did want to mention, Puerto Rico residents or bona fide Puerto Rico residents because we do see quite a lot of foreign tax credit claims from Puerto Rico residents.

The third category is non-resident aliens or NRAs and foreign corporations. Of course, we're here focused only on individual taxpayers. Non-resident aliens, NRAs normally do not qualify for the FTC. However, some non-resident aliens and some foreign corporations under certain circumstances may be allowed to credit under Code Section 906, if they engage in a U.S. trade or business and have effectively connected taxable income by the U.S.

In this case, the NRA may claim an FTC for foreign income taxes paid with respect to that type of income. Anika, I think we're ready for our next polling question.

Yes, Jim. It is time for our next polling question. So audience, here's our second polling question. Which statement below is false? Please take a minute and, click the radio button that you believe closely answers this question.

Do you think the correct answer is A, the purpose of the credit is to eliminate double taxation of income; B, property taxes may be creditable under some circumstances; C, some foreign countries do not have an income tax, or D, Married Filing Joint taxpayers can claim FTC directly on Form 1040 when no more than $600 is subject to other requirements.

I want you all to take a moment and click the radio button that best answers the question. And if you do not receive the following question, please enter only the letter A, B, C, or D that corresponds with your response in the ask question text box. Your response is time stamped.

I'm going to give you guys a few more minutes to make your selections or submit your answer in the ask question feature. All right. We're going to go ahead and stop the polling now, and let's share the correct answer on the next slide.

And the correct response is b. property taxes may be creditable under some circumstances. Now let's see how you all deal with that question. All right. Another 80%, response rate, as far as correct answers.

So great job, audience. Now I'm going to go ahead and turn it over to Loretta.

Thanks, Anika. So, when we started today, we talked about foreign tax credit concepts and mentioned a limitation. This limitation is found in the Internal Revenue Code 904, and it is the amount of the pre-credit U.S. tax on foreign source income. It is the lesser of foreign income taxes paid or accrued or the U.S. tax on the foreign income.

So, think of it this way, take an example of a taxpayer who worked abroad and paid the foreign government $4,000 of income tax on $10,000 of foreign income. Had the taxpayer earned that same income in the U.S., they would have paid taxes of $2,900. Therefore, the U.S. will only consider a credit of the $2,900, which is the limit of the U.S. tax on the foreign income.

The U.S. will not subsidize other countries' tax basis. So stated another way, the foreign tax credit does not reduce U.S. tax on U.S. income. It's strictly limited to the U.S. tax on the foreign source income. Now the maximum allowable foreign tax credit is often expressed with the formula you see here.

The numerator takes total foreign source taxable income and divides it by the denominator, which is a total worldwide taxable income. And this is the percentage of the foreign source taxable income. The fraction is then multiplied by the U.S. tax before credits and the result is the foreign tax credit limitation. And that limitation also applies to each separate category of income, which is our next topic.

Now the IRS groups types of income into specific categories to prevent taxpayers from using excess foreign taxes paid on highly taxed income to offset U.S. tax on lower taxed income. Here we see the front of Page 1 of Form 1116, maybe a little difficult to see, but the upper section shows seven categories of income and I'm going to discuss briefly each of these categories.

Category A, IRC 951 category income. So beginning in 2018, a U.S. shareholder who directly or indirectly owns 10% of the vote or value of the stock of a controlled foreign corporation also known as the CFC must include Global Intangible Low-Taxed Income also known as GILTI in their income other than GILTI that is specifically passive category income.

Now GILTI was designed to earmark U.S. multinational corporations that hold valuable intellectual property such as patents, trademarks or goodwill in low tax jurisdictions. Generally, individual U.S. shareholders are not eligible for the GILTI deduction under IRC 250 for foreign tax credits for taxes deemed paid or GILTI under IRC 960.

However, there is an option to allow an individual to make an IRC 962 election and this election allows an individual to pay the GILTI tax as if the individual was a U.S. corporation at the new reduced corporate rate. Category B is foreign branch category income. Also beginning in 2018, we have this new category.

A foreign branch is a business operation that is part of a U.S. company, but operates in a foreign country. It's defined by reference to the definition of a Qualified Business Unit also referred to as a QBU.

It includes the income and profits that are income attributable to the foreign branch, a distributive share of partnership income attributable to a foreign branch and income of other pass-through entities attributable to a foreign branch.

Pass-through entities cannot have foreign branch category income, but their non-pass-through U.S. owners can. And Category C, passive income. This is investment type income such as interest, dividends, rents, royalties, gains from sale of real or personal property and income inclusions related to Passive Foreign Investment Companies also referred to as PFICs, which are qualifying electing funds.

Also, in general, limited partners who own less than a 10% of the value in a partnership will treat their distributive share of partnership income from the partnership as passive income. And then we have Category D, which is general. Internal Revenue Code 904 defines general category income and it includes most types of earned and passive income that do not fall into another separate category.

Some examples of general include wages and other compensation earned abroad, business income from active operations, rental income from foreign real estate if actively managed, royalties from active businesses and service income such as consulting income.

In effect, it's a general catchall category. And then Category E is IRC 901(j) income. This code section states no credit is allowed for foreign income taxes imposed by and paid or accrued to certain sanctioned countries. In order to assume that foreign tax credits for these taxes are not claimed, income derived from each such country is subject to a separate foreign tax credit limitation.

Therefore, the taxpayer misuses separate Form 1116 for income derived from each such country. And because no credit is allowed for taxes paid to sanctioned countries, the taxpayer would generally compute Form 1116 for this category only through Line 17.

Keep in mind that even though they are not allowed the FTC, the taxpayer can claim an itemized deduction for them. And you can refer to Publication 514 for a more detailed list of the sanctioned countries. Category F is certain income resource by treaty. And this applies when a U.S. tax treaty reclassifies income that would otherwise be U.S. source as foreign source and the taxpayer elects to apply the treaty.

An important key here is the taxpayer must compute a separate foreign tax credit limitation for any such income for which they claim benefits under a treaty, and they must use a separate Form 1116 for each amount of resource income from the treaty country.

Form 8833 is the treaty-based return position disclosure under IRC 6114, and that can be utilized by the taxpayer to make this claim. And lastly, Category G is lump sum distributions. You could take a foreign tax credit for taxes you paid or accrued on a foreign source lump sum distribution from a pension plan. There are special formulas that may be used to figure a separate tax on a qualified lump sum distribution for the year in which the distribution is received. And you can refer to Publication 575 for more information.

Also Internal Revenue Code 409A for lump sum distributions from pension plans. And for more details, you should refer to the instructions of the form as well as Publication 514. We also have what are called practice units that you can search on the IRS.gov website, And we have one on this specific type topic titled foreign tax credit categorization of income and taxes into proper basket. And we'll provide links for the resources at the end of this session.

So now we're going to discuss the categories. How do categories of income fit into the foreign tax credit computation?

The limitation must be calculated for each separate category. Each category requires a separate Form 1116 and if there's more than three countries, additional forms are required. Part 1 of the Form 1116 includes foreign source income taxed by the U.S. The expenses, losses and deductions that are definitely related and a ratable share of not definitely related to that particular category of income.

And Part 2 shows foreign income taxes paid or accrued related to each category. In many ways, the Form 1116 is laid out similar to the 1040. The structure is income less expenses equals taxable income, and then we compute the tax. The Form 1116 can be considered the foreign subset of the worldwide Form 1040.

It starts off with gross foreign income, less expenses and then ending in the foreign source taxable income. Now sourcing is a very important aspect of accurately computing the foreign tax credit limitation. You might ask why is that? Well, when the Internal Revenue Code speaks of sourcing of income, it's referring to the origin of the income as being earned in the U.S. or in a foreign country. And before the taxpayer configured the taxable income in each category from sources outside the U.S., the taxpayer has to distinguish between U.S. sources and foreign sources.

For U.S. source income, it's considered to be U.S. source if it's earned within the U.S. or derived from U.S. based assets. The U.S. when used in a geographical sense, includes the 50 states and the District of Columbia. It also includes the territorial waters of the U.S. and the seabed and subsoil of those submarine areas, which are adjacent to the territorial waters of the U.S. and over which the U.S. has exclusive right in accordance with international law with respect to the exploration and exploitation of natural resources.

It does not include the possessions and territories of the U.S. or the airspace over the U.S. And for foreign source income, it's income determined by tax law to be earned outside the U.S. A foreign country, when used in a geographical sense, includes any territory under the sovereignty of the United Nations or a government other than that of the U.S.

And treaties will always be a factor and should be considered, but we're going to discuss those later in the presentation. So on this slide, we're providing a chart and the next slide for your reference in the future that lists sourcing rules for just some of the most common categories of income.

Passive and general category income, U.S. citizens and resident aliens are taxed by the U.S. on their worldwide income no matter where it originates. What then is the importance of the sourcing of income if all income is taxable? Well, one example is for taxpayers who qualify for the exclusion of income earned abroad.

The source of income is very important here because only income from sources within a foreign country may qualify to be excluded from taxation under IRC 911. It's also important for those taxpayers who wish to claim a foreign tax credit since the credit is calculated based on the foreign source income. And the most common general category is salaries and other compensation.

Labor or personal services is income from sources inside or outside the U.S. depending on where the labor or services are performed regardless of your citizenship or residency. And compensation includes wages, tips, salaries and other employee compensation as well as earnings from self-employment. If compensation for labor and services is earned both inside and outside the United States, an allocation must be made under the regulations.

And note that partnership income retains its character where it flows through to the individual's Form 1040. So if 60% of the partnership income is foreign source, then 60% of the distribution is going to be foreign source. And this is true even if the partner only performs services in their role as partner in a foreign country.

It's the residents of the payer that generally determines the source of interest income. IRC 861(a)(II) provides dividends from domestic corps our U.S. source income. Dividends from foreign corporations are foreign source. There are always some exceptions, so just make sure you do your research when you're working on these topics. Rent, real estate and natural resource royalties are sourced where the property is located. Royalties and intangibles such as patents, copyrights, et cetera are sourced where the property is used.

And continuing on the next slide, we have the sale or exchange of real property. And this is source where the property is located, which is pretty straightforward. And we have the sale exchange of personal property and this is a source where the sellers tax residence is located, but there's usually always an exception. In fact, sourcing has a lot of exceptions. I'll just mention this one for personal property. Basically the exceptions intended to discourage the establishment of offices and tax havens to change the source of the income from the sale of personal property.

And then we have social security benefits. These are U.S. sourced. And lastly, we have items like scholarships, fellowships, grants, prizes, and award type items. And these are sourced by the residents of the payer. So if any of these are made by a U.S. citizen, resident, a domestic partnership or corporation, a state trust, the U.S. or individual states, then they'd be sourced as U.S. source. The exception deals with receipt of such by someone other than a U.S. person for activities conducted outside the U.S.

And now I'll turn it over to Mary Ann to continue.

Thanks, Loretta. So generally, for a foreign tax levy to qualify for the FTC, all four of the tests on this slide must be met. First, the foreign tax must be imposed on the taxpayer. So a credit can be claimed only for foreign income taxes that are imposed on the taxpayer. For example, an income tax imposed by a foreign country or U.S. possession on wages earned in that foreign country or U.S. possession is considered imposed on that taxpayer.

Next, the foreign tax must be paid or accrued by the taxpayer. So, generally, taxpayers can only claim the credit if they paid or accrued the foreign tax to a foreign country or U.S. possession. There are some instances in which taxpayers can claim the credit even if they do not directly pay or accrue the tax, such as if a joint tax return is filed, the spouses can claim the credit based on the total foreign income taxes paid or accrued by both spouses, a partner or an S corporations shareholder, or a beneficiary of an estate or trust. And for a more extensive list, you could refer to Publication 514.

The third item is that the foreign tax must be a legal and actual tax liability. This is an extremely important concept that is often missed. And the amount of foreign tax that qualifies for the credit is not necessarily the amount that is paid to the foreign country or U.S. possession, and it's not necessarily the amount of tax that's been withheld by the foreign party. The amounts paid and/or withheld can be in excess of the actual foreign tax liability, and this excess is not considered a creditable foreign income tax. In other words, an FTC cannot be taken for income taxes paid to a foreign country if it's reasonably certain the amounts would be refunded, credited, abated, rebated, or forgiven if a claim was made.

Another important point to note too is, did the taxpayer utilize the correct income tax rate for their legal and actual foreign income tax liability? If the U.S. has a treaty in place with the treaty country, then the actual and legal tax liability is the tax rate specified by the treaty and not necessarily the typical statutory rate. So, therefore, we need to be aware of whether a tax treaty exists and ensure that the amount of tax used for the FTC computation is computed at the treaty rate and not at the statutory rate. And we'll talk more about this issue in a couple of minutes.

Now finally, the fourth bullet is that the foreign tax must be an income tax or a tax in lieu of an income tax. Now whether a foreign levy is an income tax is determined independently for each separate foreign levy. And a foreign levy is considered an income tax if it meets both of the following requirements. First, it is a tax that must be paid, and there is no specific economic benefit received from paying it. And second, either the foreign tax is a net income tax that meets the requirements of regulation Section 1.901-2(b) or the foreign tax is a tax in lieu of an income tax that meets the requirements of regulation Section 1.903-1.

For the first requirement, what do we knew when we say it has to be paid and there's no specific economic benefit received for that payment? Well, a foreign levy is considered a tax and will generally be eligible for the FTC if it's a compulsory payment. And this means the tax is not voluntary, and there is no special economic benefit provided in return for that payment. And an economic benefit is where the taxpayer received or will receive in exchange for that payment, goods, property, or services, and this would not be an income tax in this instance.

Regarding the second requirement, where either the foreign tax is a net income tax that meets the requirements of regulation Section 1.901-2(b) or the foreign tax is an in lieu of an income tax that meets the requirements of regulation Section 1.903-1. Well, this is where reprieve was offered in the form of notice 2023-55 and notice 2023-80.

But before I go into these notices, I want to mention that the new FTC regulations were finalized in 2022, and they replaced some of the old regulations. Now under the old regulations, which were in place since 1983, but have had some revisions, since basically required that the predominant character of the tax must be that of an income tax in the U.S. cents. And the predominant character test is met if the foreign tax is likely to reach a net gain. And to meet this net gain, the foreign income tax must include a realization of income. It must include gross receipts based on actual gross receipts or on a calculation likely to produce an amount not greater than the fair market value of the gross receipts. And third, the foreign taxes imposed on net income, which includes a recovery of expenses.

Now these tests were basically replaced by the new regulations finalized in the 2022 calendar year with a slightly updated version of realization and gross receipts, a new cost recovery expense requirement and an attribution requirement. And importantly, the new regs replaced the predominant character test with substantial conformity. Under the new regs, the net gain requirement is based on whether there is substantial conformity in the principles used to calculate the base of the foreign tax to the base of the U.S. income tax and not on the predominant character test.

Now we're not going to go into detail today on these new regulations since, as I mentioned before there were two notices issued that provide relief for the new regs and which advise taxpayers they can rely for the most part on the old regs and the predominant character test. To reiterate the two notices, notice 2023-55 and notice 2023-80 provide relief for the new regulations that were finalized in the 2022 tax year. In notice 2023-55, taxpayers may apply regulation Sections 1.901-(2)(a) and (2)(b) as contained under the old regs, which contain the predominant character test.

An exception to this relief is for gross basis taxes imposed on the gross receipts or gross income arising from the provision of digital services. In addition, taxpayers may apply regulation Section 1.903-1 regarding the taxes in lieu of an income tax without applying Regulation Section 1.903-1(c)(2)(IV), which is the jurisdiction to tax excluded income, and Regulation Section 1.903-1(c)(2)(III), which is the source based requirement.

Now notice 2023-55, which was released back in July 2023, provide a relief for taxable years beginning on or after December 28, 2021 and ending on or before December 31, 2023. So basically, relief for the 2022 and 2023 calendar years. On December 11, 2023 notice 2023-80 was released and extended the relief period to mean taxable years beginning on or after December 08, 2021 and ending before the date that a notice or other guidance withdrawing or modifying the temporary relief is issued.

And so far to date, no other guidance has been issued, so the relief we're discussing today is still currently available. In addition to extending relief, notice 2023-80 also addresses the application of the relief to partnerships, including whether the partnership or its partners would apply the temporary relief. If before December 11,. 2023 a partnership did not apply the temporary relief for partnerships relief year ending on or before December 31, 2022, a partner may apply temporary relief to its share of the partnership's foreign income taxes.

And for partnerships with taxable years beginning after December 31, 2022 a partnership's application of the temporary relief for relief year will cause a partner to be required to apply the temporary relief for the relief year to all other foreign taxes for which the partner will be eligible to claim a credit as provided in IRC Section 901 unless the partner does not control whether the partnership applies the temporary relief for the relief year.

Now we just discussed the four tests that must be met for taxes to qualify for the FTC, and I'm going to repeat them. Tax must be imposed on the taxpayer. Taxpayer must have paid or accrued that tax, and the tax must be the legal and actual foreign tax liability. And the tax must be an income tax or a tax imposed in lieu of an income tax.

However, there are some foreign income taxes that we'd like to mention that are not creditable, and one category of such income taxes are those paid to sanctioned countries. Other examples of non-credible items include custom duties, fines, penalties, interest, and other similar obligations. Please note the taxpayer may be able to take a business deduction for some of these items, such as custom duties under IRC Section 162, but of course, never for fines or penalties.

Another group of taxes for which the FTC cannot be taken are excise and inheritance taxes. Excise and inheritance taxes are not credible taxes for FTC purposes. And Publication 514, which I already mentioned is a very good resource as it has a list of items that do not qualified for the foreign tax credit, and it also provides a list of taxes for which you can only take an itemized deduction.

Now let's look at where the creditable foreign income taxes are entered for the taxable year. This would be on Form 1116, Page 1, Part II, the foreign taxes paid or accrued section. We have this section on the form posted on the slide, and a taxpayer electing to claim the FCC would enter the amount of the foreign income taxes they paid or accrued for that applicable year in this section.

Now the taxpayer also has to indicate whether the taxes entered in this section are based on the paid method or the accrued method, not both. So in addition to electing to take the FTC, which is done by attaching the Form 1116, the taxpayer also needs to make an election in the same section Part II for whether they're claiming the FTC based on taxes that they paid by checking box (j) or based on taxes accrued by checking box (k). So as you can see on the slide, we circled these two small little boxes.

Now, typically, individual taxpayers on the cash method of accounting will elect to take the FTC for the taxes they paid during the year, and that's by selecting the paid method. But a cash basis taxpayer may instead elect to claim the FTC on the accrued basis by checking the accrued box (k) in part II of the Form 1116. So a taxpayer who has been on the paid method can switch to the accrued method in a later year. And once the accrued method is selected, the taxpayer must use the same accrued method for all subsequent years. And this is per IRC Section 905(a).

Now for the accrued method, taxes accrued when all events occur, that's fixed the amount of the tax. So, basically, if the taxpayer uses the accrued method of accounting, they can claim the FTC only in the year in which they accrue the tax. Foreign income taxes accrue when all the events have taken place that fix the amount of the taxes and the liability to pay them.

And this occurs on the last day of the tax year for which the foreign return is filed. That's the foreign income tax return. So another important point to note when taxpayers are on the accrued method for FTC purposes, IRC Section 986 generally calls for the conversion of foreign income taxes into U.S. dollars based on the average exchange rate for the year of the actual payments.

For partner or s corporation shareholders, if the taxpayer is a member of a partnership or a shareholder in an s corporation, the taxpayers can claim the credit based on their proportionate share of the foreign income taxes paid or accrued by the partnership or the s corp. These amounts starting in 2021 will be shown on Schedule K-3 received from the partnership or the s corp. And prior to that year, the information should have been shown on Schedule K-1.

One last thing about the accrued method before we move on to the next slide. Now there's a very narrow exception of choosing the accrued method on an amended return. Remember, you can't switch from the paid method to the accrued method on an amended return. But if the taxpayer never elected the FTC before and so, therefore, never made any paid or accrued election before even on the original return, they can then elect the accrued method on an amended return.

And this exception can be found in the new regulation effective for tax years after December 28, 2021 that allows you to elect the accrued method for the first time on an amended return. But this is only allowed once, and in the very first year Form 1116 is ever filed by the taxpayer. And this is per Treasury Regulation 1.905-1(e)(II). Now the U.S. has tax treaties with many countries.

And under the terms of these tax treaties, residents or citizens of the U.S. are taxed at a reduced rate or are sometimes even exempt from foreign taxes altogether on certain types of income received. And portfolio income is, very common. That's the typical situation that we see. To pay only the legal amount of tax, an eligible taxpayer must invoke the treaty and provide a statement to the withholding agent requesting the lower rate.

If the taxpayer doesn't invoke the lower treaty rate, a foreign statutory withholding rate, which is almost always higher is applied by the withholding agent. And that excess is not deemed compulsory and therefore fails the previously listed fourth requirement. If a lower treaty rate exists, taxpayers are only allowed to claim the lower treaty rate.

And if the taxpayer wants the excess back, they have to invoke the treaty and file an amended return with the foreign country. So first, see if the tax treaty exists between the U.S. and the foreign country. If it does, determine if a lower rate is applicable to the type of income in question. The IRS.gov website actually houses the latest tax treaties and you can access this by going to IRS.gov and typing in the search box tax treaties. There is also a publication on treaties, Pub 901, also called tax treaties. So, I think now is the time for our third polling question.

Yes. Yes. It is a perfect time for a polling question. So, audience, here's our third polling question. Taxpayer A earned $1,000 in passive income in country X and had a $150 withheld. Country X tax treaty stipulates a 10% withholding rate on passive income. What is the maximum amount of country X tax, the taxpayer A can claim for, foreign tax credit purposes?

Answer a. for $100; b. for $200; c. for $300; or d. actual amount withheld by country X. I want you all to take a moment and click the radio button that best answers the question. And if you don't receive the polling question, please enter only the letters a, b, c, or d that corresponds with your response in the ask question text box. Your response will be time stamped.

Now I'm going to give you guys a few more seconds to make your selection or submit your answer and ask question feature. Okay. We're going to go ahead and stop the polling now. So, let's share the correct answer on the next slide. And the correct response is a. $100. The taxpayer can file for the refund from the foreign country. I see that 81% of you responded correctly, so that is a great correct response rate.

Loretta, it looks like I am going to pass the mic back to you.

Thanks, Anika. So now we're going to focus on Line 1 of the Form 1116 which is the line for the gross income from foreign sources. We've been discussing how the foreign tax credit is a mechanism available to relieve double taxation. Another is the foreign earned income exclusion, also known as the 911 exclusion. We're not going to be going into the foreign earned income exclusion, except to say that it's available to U.S. citizens and residents who live and work in a foreign country and meet some various tests.

There are special rules for U.S. government employees and that generally they don't qualify for the foreign earned income exclusion because their income earned abroad is not considered foreign source. Of course, there are exceptions for contractors, combat zones, et cetera. So, make sure to dig into Publication 554 and 516 for those specific situations. And we'll have those listed in the list of resources at the end of this presentation.

Now the foreign earned income exclusion adjustment is claimed by filing Form 2555 and attaching it to the Form 1040 excuse me. And as we mentioned in the categorization topic, foreign earned income falls into the general category. Line 1 gross income must be adjusted to also remove any earned income that is excluded under the foreign earned income exclusion. Remember the Form 1116 is a foreign portion of the total worldwide Form 1040 income.

And since the taxpayer has excluded a portion of the worldwide income from taxation on the 1040, then the foreign subset of that total should also be reduced in Line 1a.

And now we're going to take a look at an example. So here the facts are, a taxpayer files a 2022 tax return and includes a Form 1116 general category form. The taxpayer was employed in country X. The total gross foreign wages were $245,000 and the taxpayer qualifies for the foreign earned income exclusion of $112,000 as reported on the Form 2555.

The taxpayer will enter country X in Column A and $133,000 on Form 1116 Part 1, Line 1a. This is the net number resulting from the difference between the foreign employment income of the $245,000 less the $112,000 of foreign earned income exclusion. And some software may show the gross and the reduction for the foreign earned income exclusion to the left, but some software programs just show the net amount. So just be aware of the adjustment required here.

And another corollary aspect to the adjustment we just discussed is that taxpayers not only have to reduce foreign earned income by any foreign earned income exclusion taken, but also reduce the foreign earned income taxes allocable to that excluded income from Form 2555.

A taxpayer whose foreign earned income is completely excluded cannot take a credit for any of the foreign income taxes allocable to that income. On the other hand, if only a part of the foreign earned income is excluded, then the part that's not excluded under Section 911 can also be used to compute the foreign tax credit.

And this reduction of foreign tax is reported on Line 12 of the Form 1116. And the computation for Line 12 is an off the form computation, meaning it's not shown in the body of the Form 1116. A schedule showing this computation should be attached to the tax return. And to compute the amount on Line 12, the taxpayer must apply a formula to arrive at the amount of this adjustment. So, let's take a look at the formula. Here's the formula used to compute taxes that are allocable to the excluded income.

The numerator of our fraction is excluded earned income minus deductible expenses allocable to excluded income and the denominator is foreign earned income minus unreimbursed deductible expenses. Then as we mentioned earlier, we take the fraction, multiply it by the income taxes paid or accrued to the foreign country and we get the amount of foreign income tax paid that cannot be used as a credit.

And now we're going to take a look at an example. So in this example, we have a U.S. citizen, works for Company B and lives in Country Z. Here are the facts. So we divide the numerator, which is our foreign earned income exclusion of $112,000 by the total foreign earned income of $175,000. And that percentage, which comes to 64% is then multiplied by the foreign income taxes paid of $45,000. So since 64% of the income was excluded, we now have to exclude 64% of the foreign taxes paid.

So Form 1116 Line 12 would show a reduction of $28,800. And now I'm going to explain another common adjustment to a different category of income. And this adjustment pertains to the passive category income, for example, capital gains and qualified dividends. Because of the preferential tax treatment of capital gains and qualified dividends under U.S. tax law, even though the taxpayer may otherwise be in a higher tax bracket, an adjustment is required to reduce the amount of foreign source capital gains and qualified dividends by a rate differential when computing the foreign tax credit.

The effect of this adjustment is to only include a portion of the capital gains in the IRC 904 fractional limitation since the U.S. tax rate that applies to the capital gains is less than the rate that applies to the ordinary income. Or stated in another way, because tax and capital gains at a low rate is the same as taxing just part of the gains at the full rate, only the part that's theoretically taxed at the full rate should enter the IRC 904 limitation calculation here.

So under 904(b)(2), a gain from the sale or exchange of capital assets is included in foreign source taxable income only to the extent of foreign source capital gain net income. And because qualified dividend income also receives the preferential tax treatment, the rate differential adjustment is required for the qualified dividend income as well.

The adjustments made by multiplying the total gains and qualified dividends within each capital gain rate category by a decimal amount specific to each rate. The rates and the amounts by which are multiplied are found in the instructions for the Form 1116 and there's a worksheet for this adjustment.

Publication 514 is also a good resource. And then don't forget, there's also a separate adjustment that's required for the alternative minimum tax. So earlier, we discussed the four required tests of credibility. One of those was the tax must be the legal and actual foreign tax liability. The tax treaties can affect this determination. The U.S. has income tax treaties with over 60 foreign countries.

An income tax treaty is an agreement between the U.S. and a foreign country on the tax treatment of certain items of income. There are reduced rates and exemptions, which vary among countries and specific types of income. If there is no treaty between a foreign country and the U.S., the taxpayer must pay tax on the income in the same way and at the same rates as shown in the instructions for the Form 1040-NR.

Tax treaties reduce the U.S. taxes of residents of foreign countries. With certain exceptions, tax treaties do not reduce U.S. taxes of U.S. citizens or residents. Under these treaties, the rate of foreign withholding may be reduced. Normally a flat statutory rate is withheld, often it's 30%. And typically there's a reduced withholding rate under the treaty for investment income such as dividends and interest. The legal tax liability is not necessarily what was actually withheld by the foreign country. The legal tax liability is limited to the lower treaty rate.

So where our lower treaty rates available, it's the taxpayer's responsibility to provide a withholding statement invoking the treaty to the payer. Otherwise, the tax is not due or legally owed. So the foreign tax credit should not be allowed if the taxpayer did not take all the necessary steps and exhaust all necessary, and available remedies to minimize the final tax bill with the foreign country. Treaties may not follow the general U.S. sourcing rules and certain income can also be resourced by the treaty.

And this I had mentioned earlier in the presentation when I discussed the separate categories of income. I think it's now time for our fourth polling question, Anika.

Yes. It is. So, audience, we're going to go ahead with our fourth polling question, and it states, a U.S. taxpayer works in country X and qualifies for the foreign exclude -- FEIE, of a $112,000, and taxpayers' total wages on Form 1040 were $500,000 of which $400,000 were foreign. What amount should be shown on Form 1116 Line 1? Is it a. $500,000; b. $400,000; c. $388,000; or d. $288,000?

I want you all to take a moment and click the radio button that best answers the question. And if you do not receive the polling question, please enter only the letter a, b, c, or d that corresponds with your response in the ask question text box. Your response is time stamped.

I'm going to give you guys a few more seconds to make your selection or submit your answer in the ask question feature. Okay. So we're going to go ahead and stop the polling now, and let's share the correct answer on the next slide. All right. So the correct response is d. $288,000. So that is $400,000 of foreign source income less the $112,000 of the foreign earned income exclusion. And I see that 80% of you have responded correctly. So, that's a pretty impressive correct response rate.

Mary Ann, it seems the audience is still engaged with us and listening, so I'm going to turn it back over to you.

Okay. Thank you so much. So claiming the FTC is an election, and we stated earlier the election is made simply by attaching Form 1116 to the individual's Form 1040. So recall, also, we said earlier, there is an exception to filing and attaching the Form 1116 if the FTC is less than $300 for a single taxpayer or $600 if the taxpayer is married filing jointly and other requirements are met, in which case the Form 1116 would not be required to be attached or filed.

Now if the taxpayer's FTC, for whatever reason is under exam, what information must the taxpayer provide?

Well, taxpayer must provide information to substantiate and support with evidence, the credit, and all information provided on Form 1116. In a perfect world, the taxpayer provides a receipt for each foreign tax payment if the tax has already been paid. Or if the taxpayer claiming foreign income taxes using the accrued method, the foreign tax return on which the accrual is based is required.

This is direct evidence and preferred substantiation under Treasury Regulation 1.905-2. The receipt or the return can be the original, a duplicate of the original, or a duly certified or authenticated copy. If the receipt or return is in a foreign language, then a certified translation must be furnished by the taxpayer. So always remember, the burden of proof is generally on the taxpayer.

In an imperfect world in which we operate, if the taxpayer has established that it's impossible to furnish direct evidence, Treasury Regulation 1.905-2(b) lists acceptable secondary evidence. So in lieu of a receipt for the payment of foreign income taxes, the taxpayer can submit a photocopy of the check, draft, or other form of payment showing the amount and date of payment together with certification identifying it with the tax paid and confirming the tax was paid from taxpayer's account.

In case the credit is claimed on an accrued method and the receipt of payment is not available, the taxpayer must show that the tax is accrued in the tax year. If the foreign tax return is not available, the credit is claimed on an accrued method, and the foreign tax has not been paid, the taxpayer must provide the following items, a certified statement of the amount accrued, excerpts from the taxpayer's books and records showing amounts of foreign income tax and related tax.

Documentation substantiating the computation of the foreign tax established by foreign legal authority, such as foreign law, assessment notice, or other evidence. If at any time the foreign tax receipts or foreign tax returns become available, what must the taxpayer do? Well, the taxpayer must promptly submit them to the IRS.

In the case of taxes withheld at source from items such as dividends, interest, royalties, compensation, or other forms of income where evidence of withholding and of the amount withheld cannot be secured from those who have made the payments, the IRS may accept secondary evidence of such withholding and of the amount of the tax so withheld having due regard to the taxpayer's books of account and to the rates of taxation prevailing in the particular foreign country during the period involved. In case of withholding taxes, the taxpayer must be able to document not only that the tax was withheld, but also that it has been paid. An official tax receipt issued by the foreign government is entitled to the presumption of regularity.

Now for a foreign tax to be creditable under Section 901, it must be compulsory as we've mentioned before. If the taxpayer legally required to pay the tax? Does the amount of foreign tax paid exceed a taxpayer's legal liability? The point here is, does the taxpayer in good faith, pay only the foreign income taxes required of them? This goes back to one of the criteria for credibility. The tax must be the legal and actual foreign tax liability. The focus here is on the word legal. For example, if a treaty exists which reduces the normal tax rate on a particular type of income, did the taxpayer do everything they could to apply the lower treaty rate?

Another example, if there is a controversy regarding the application of a foreign tax law, did the taxpayer do everything they could to mitigate the tax, including seeking legal advice, going to appeals, competent authority, or litigating the issue in court, et cetera. A competent authority arrangement is a bilateral agreement between the United States and the treaty partner to clarify or interpret treaty provisions.

Having said that, there is a caveat. A taxpayer's exhaustion of remedies should be practical and cost efficient in relation to amounts at issue and likelihood of success. Reasonable cost for individuals can be an issue because the amount in controversy may not justify spending a lot of resources to contest the item. So taxpayers may ordinarily take a reasonable business approach weighing costs and benefits in settling foreign income tax issues. And for the applicable law, please refer to Treasury Regulation 1.901-2(e), in particular (e)(V). Remember, Polling Question #3, taxpayer may wish to file an amended return with the foreign country to claim or refund on the taxes over withheld.

Now when determining whether the taxpayer has exhausted all administrative remedies, several factors should be considered. The burden of proof is on the taxpayer to show that all effective and practical remedies have been exhausted to contest the foreign tax liability. Using, of course, a reasonable business approach weighing costs and benefits in settling the foreign income tax issue. What available channels were there with the foreign tax authority? Did they avail themselves of appeals, competent authority, and amnesty program, perhaps the court system?

Well, let's take a look at an example. James, a U.S. taxpayer earned dividend income of $100 in country X. 20% of income or $20 of foreign income taxes was withheld on this income and paid over to country X. However, a tax treaty between country X and the U.S. provides that the maximum rate of withholding on dividend income earned in country X is 15%. Therefore, there is an overpayment to country X of $5. When James files the claims for FTC with the U.S., only $15 or 15% of a 100 qualifies as foreign income taxes paid, because this represents the compulsory amount of foreign income taxes James was legally liable to pay.

James should file a claim with country X as a remedy for the $5 he overpaid through withholding. If the IRS were to allow FTCs without requiring the U.S. taxpayers to reduce their foreign tax obligations to those legally imposed, taxpayers would have little incentive to challenge any foreign tax, whether or not properly imposed. As a result, the cost of excessive foreign income taxes could be improperly shifted to the U.S.

Therefore, it's very important to ascertain whether the foreign income taxes claimed are compulsory because as a general rule, taxpayers cannot claim FTCs for amounts paid to foreign taxing authorities when they have failed to exhaust all effective and practical remedies to reduce their foreign tax liability.

Now we have another example. So James, in example one, claims the benefit of the treaty by filing for a refund of $5 with country X. The claim is rejected by country X. So James then invokes the competent authority procedures of the treaty, the cost of which is reasonable in view of the amount at issue and the likelihood of success is good, but the refund is still rejected. So the cost of pursuing any judicial remedy in country X would be unreasonable in light of the amount at issue and the likelihood of success. So James decides not to pursue any judicial remedy. The $5 is now a compulsory payment and may be eligible for the FTC.

Be aware that competent authority is only available by treaty. It's not an option in all situations. So please check each specific tax treaty between the U.S. and the foreign country in question.

And now let's talk about timing of the credit. A taxpayer can elect to claim an FTC on either the cash basis, known as the paid method, or the accrued basis by checking either box (j)or (k) on Page 1 in the Form 1116. Most individuals are cash basis, so they are on the paid method. They can elect the accrued method, but as I previously stated once the election is made to account for foreign income taxes on the accrued method, it's binding on all future years.

So we want to reiterate some information regarding amended returns that we previously mentioned. And the general rule is that the taxpayer can switch to the accrued method on an amended return. However, as I mentioned or alluded to previously, there is a new Treasury Regulation that gives a very limited exception. And Regulation 1.905-1(e)(II) now states, if a taxpayer claims an FTC for the very first time, an election to claim the FTC using the accrued method may be made on an amended return.

So, for example, in year one, let's say we have a taxpayer who's a U.S. resident with foreign source income, and the taxpayer paid their foreign income taxes. But for whatever reason, they never claimed the FTC on their timely filed original return, nor did they ever previously claimed the FTC. In year two, taxpayer learns that claiming the FTC on the accrued method would benefit them greatly. So they amend their year one return and claim the FTC on the accrued method.

So under the new regulation, taxpayers' election is now permitted. And because the taxpayer did not claim FTC in any prior years nor on the timely file of the original return, the taxpayer had never chosen a method for purposes of the FTC. So this means the election to use the accrued method on the amended return is the first time the taxpayer is choosing a method to claim the FTC, and it's therefore valid.

A foreign tax redetermination occurs when there's a change in a taxpayer's foreign tax liability that affects the taxpayer's FTC previously claimed. For example, a taxpayer claims an FTC in year one based on foreign income taxes paid or accrued in that year. Subsequently, in year three, the taxpayer is audited by the foreign country, and the original tax liability for year one either increases or decreases. The redetermination impacts the foreign tax credit claimed in year one.

Now often, a taxpayer cannot claim all the taxes as a credit which exceed the income tax limitation. So FTC carryover and carryback rules are simple. Taxpayers must first carry back one year and then forward 10 years. The unused excess foreign income taxes eligible to be carried back and forward are reported on Form 1116. Carrybacks and carryovers are figured separately for each separate category, and a period of less than 12 months, a short year is considered a tax year.

A taxpayer can only carry over excess credits if the taxpayer chooses to clean the FTC. There is no credit carryback or carryover if taxpayer chooses to deduct. If they do deduct them, they have to treat any carryback or carryover as if they were used in that year. A taxpayer in an excess credit position for a given year is allowed to carry back or carry forward the excess foreign income taxes, but there is one exception. No carryback or carryover is allowed for the guilty income category.

The FTC carryback and carryover amount is shown on Line 10 of the Form 1116. There should be a statement attached to the tax return showing the carrybacks and carryovers and how they are used. But please note that starting in the tax year 2021, a new schedule will be for reconciliation of carryover or carryback is part of Form 1116. So if you have a carryover or carryback, a schedule will be to Form 1116 for each separate category of income should be attached. And this is required for both regular tax and the AMT.

Now a redetermination of the U.S. tax liability is required when the foreign income tax claimed under the payment that is fully or partially refunded. IRC 905(c)(I) specifies three main types of foreign tax changes that result in the foreign tax redetermination for accrued taxes. If taxes, when paid or later adjusted differ from the amounts accrued by the taxpayer and claimed as a credit, accrued taxes that are not paid within two years after the close of the taxable year to which the taxes relate or a refund of foreign income taxes.

Now taxpayers must file an amended return to notify the IRS of a foreign tax redetermination. File a Form 1040X with the revised Form 1116. And if a redetermination results in an additional U.S. tax due, but the tax due is eliminated by a carryback or carryover, a Form 1040X does not generally need to be filed. There is the exception to filing an amended return if the FTR is under a certain threshold amount, that is $300 for individual filers or $600 for joint filers, and the taxpayer meets other certain criteria found, which can actually be found in Pub 514. And this is a de minimis exception.

And finally, just like the new Schedule b as part of the Form 1116 starting 2021, there is another new schedule to the Form 1116, and this is Schedule C, the foreign tax redetermination schedule. We're not going to get into this in-depth, but only to say that the new schedule must be completed and attached to the return, and it's used to identify and better track FTRs that occur in the current tax year in each separate category, the years to which they relate, and other information to notify the IRS of the FTRs that occurred in the current year that may relate to prior years. The new Schedule C standardizes the way the FTRs are reported. Again, a separate Schedule C of the Form 1116 must be completed for each category of income.

So let's take a pause now for our fifth polling question.

Sure thing, Mary Ann. So, audience, here is our fifth polling question. In 2019, a taxpayer is required to pay additional foreign income taxes for tax year 2014. The taxpayer must file an amended return to report a foreign tax redetermination. By what date is the amended return due? Enter a. for October 15, 2025; enter b. April 15, 2021; enter c. April 15, 2022; or d. April 15, 2025.

I want you all to take a moment and click the radio button that best answers the question. Now if you do not receive the polling question, please enter only the letter a, b, c, or d that corresponds with your response in the ask question text box. Your response is time stamped. I'm going to give you guys a few more seconds to make your selection. We'll submit your answer in the ask question feature.

All right. So we're going to stop the polling now, and let's share the correct answer on the next slide. And the correct response is d. April 15, 2025. All right. So I see that 84% of you responded correctly. That is a nice job, everyone. I thought that one might be a little bit tricky, but you guys proved me wrong. So now I'm going to turn it over to Jim, so he can go over some resources with you.

Thank you, Anika. My job is pretty easy here. I'm just going to mention on this slide some of the resources that you may find helpful. And the first one is Pub 54. It's the tax guide for U.S. citizens and residents, aliens abroad. And of course, Publication 514, foreign tax credit for individuals, and that is actually the go to resource for all things foreign tax credit and then Publication 901, U.S. tax treaties, of course, the forms and instructions for Form 1116. We also have a taxpayer assistance line both for domestic and for taxpayers outside of the U.S.

Now one item that is not listed here on the slide was a publication Loretta had mentioned, and that is Publication 516. And Pub 516 has a discussion on government civilian employees stationed abroad. So, if you find that helpful in your case, please refer to that publication, and it's Pub 516. Back to you.

Thanks, Jim. So hello again, audience. We have made it to the fun part, which is our last Q&A. So I am going to be moderating the session. But before we start, I do want to thank everyone for attending and staying engaged during today's presentation, The ABCs of Foreign Tax Credit for Individuals.

Now earlier, I did mention that we want to know what questions you all have for our presenters. So here is your opportunity. If you haven't input your question just yet, there's still some time. So go ahead and click on the drop-down arrow next to the ask question field and type in your question and click send. Jim, Loretta, and Mary Ann are all going to stay on with us to answer your questions.

But one thing before we get started, we might not be able to answer all of your questions, that have been submitted, but we'll answer as many as time allows. So, let's go ahead and get started so we can get as many questions as possible. All right. And you guys have submitted a lot of great, relevant questions.

I'll start with this one. If a taxpayer is claiming foreign tax credits for both general and passive categories and his income tax is less than $600, filing a joint tax return. Is he only required to file the Form 1116 for general income? Yes. The general category income?

Anika, I can take that question.

Okay.

Now, in this case, the taxpayer has both passive and general category. So, the taxpayer, in this case, would not meet the very narrowly defined exception to not attach a Form 1116 because that exception only applies if the taxpayer has only foreign source income passive. In this case, the taxpayer has general category as well, so the taxpayer would have to file a Form 1116 for both the passive and the general category, even though they've met the threshold of under $600 of foreign taxes paid for a married filing joint.

Thanks, Jim. That was a great response. I have another question here. It seems like a really good question. So let me go with this one. So, the person asking the question was referring to the slide. So it said the upper side from Page 7 -- I'm sorry of the Form 1116. So the upper side from Page 7 says if more than three countries, additional Forms 1116 are required.

However, the tax software that they use allows them to identify the country as for passive income, which is investment interest and dividend income. So it's just acceptable.

Anika, I can take that question. Now we've got to be very careful because, generally speaking, you will have to put the name of the foreign country on the Form 1116 for a particular category of income. And Form 1116 only allows three columns. And if you have more than three foreign countries, you're going to have to add additional Form 1116 for that category of income.

Now the question asked, if the software allows for various rather than actually putting the name of the foreign country, can they do this for interest and dividend income? Well, the only exception got to be very careful here.

The only exception to allowing you to put various on the Form 1116 is if the payer of the interest or dividend is a what we call, RIC or Regulated Investment Company such as a mutual fund. So if that is the case, yes, you can either put various or you can put in place of the name of the country, RIC or Regulated Investment Company.

Because, for example, a mutual fund will probably be paying foreign taxes to many, many, many foreign countries. So it will be impractical to list them all out. So but that is a very narrow exception that if you have mutual fund or other RICs that you can actually either put RIC or various instead of the name of the foreign country.

Thanks, Jim. That was a very thorough response. I'm sure the audience appreciated that. So I have another question, that came in in regard to, the no tax treaty. So the question is, can you get foreign tax credit if there is no tax treaty between the U.S. and that country?

Hi, I could take that question. I would have to say that, generally, the answer is yes, but specifically, the answer would be no if it happens to be a sanctioned country. So just because there's no treaty doesn't necessarily mean a taxpayer wouldn't be allowed to take a foreign tax credit, making the assumption that he or she qualifies for all the other rules that we went over today. But generally, the answer is yes unless it's a sanctioned country.

Okay. Thank you so much for that response. So I have another question for you guys. So if a person is required to work in a foreign country and is paid by the U.S. company located in the U.S., is this income treated as foreign source income?

Anika, can you please repeat that question one more time?

Yes, I'm sorry. So it says that if a person is required to work in a foreign country and is paid they work in a foreign country, but they're paid by a U.S. company that is located in the U.S. Is his income treated as foreign source income?

Yes. The short answer to that question is yes. Now when it comes to sourcing of personal services type of income such as salary or wages, the sourcing is based on where the performance of that service is performed.

So if the person is working in a foreign country, although a person is being paid by a U.S. company, the determining factor is where is this work performed. So if the person, the taxpayer is working in a foreign country, being paid although by a U.S. company, that is still a foreign source income. So it's based on where the performance of service is done.

Okay. Thanks, Jim. I appreciate that that response, and I'm sure the audience does as well. Let me see what I have here. Okay. So I have one more question here. It says, if a taxpayer pays taxes in a foreign country on capital gain reported on the Form 1099 received from a U.S. brokerage firm, can they use the foreign tax credit on that capital gains tax?

I'll take that one as well, Anika. Yes, I don't see why not just based on the question why the taxpayer will not be allowed a small tax credit because capital gains tax is, I would say, considered income tax, capital gains income and if the foreign tax is paid on that type of income, then I would say, generally speaking, if all other requirements are met, that tax, that capital gains tax paid in a foreign country should be allowed, should be eligible for the foreign tax credit.

Thanks again, Jim. I'm going to direct this next question to Loretta. So, the question is, can nonresident aliens claim the foreign tax credit?

Hi, there. I'm sorry. I had myself on mute. So your question is can nonresident aliens claim the foreign tax credit?

Generally, nonresident aliens cannot claim the foreign tax credit because they're not taxed by the U.S. on their foreign source income. However, when a nonresident alien is engaged in a trade or business in the U.S. and they're taxed on their effectively connected income, which is also referred to as ECI, they may claim a foreign tax credit for the foreign income taxes paid with respect to that income, provided the tax is not imposed solely because of their residency or citizenship.

Thank you so much for that response, Loretta. So audience, I do apologize, but it looks like that is all the time that we have for questions. But I do want to thank the Q&A panel for answering your questions and sharing their knowledge and expertise. But we don't want to leave without our final polling question.

So our final polling question is going to be a simple attendance check. So please select the radio button on the screen. If you don't receive the polling question, just add the letter A as your response in the ask question text box.

Your response is going to be time stamped. So I'm going to give you guys a few more seconds to select that radio button or submit the letter A in the ask question feature.

All right. So we're going to go ahead and stop the polling now. And thank you all for responding and participating with all of the polling questions. Before we close out today's session, Loretta, can you start us off with some key points that you want the attendees to remember from today's webinar?

Of course. So some points to keep in mind. One, the U.S. generally taxes its citizens and residents on worldwide income. The foreign tax credit is one mechanism to alleviate double taxation. The foreign earned income exclusion is another mechanism. And taxpayers can make an annual election to either claim the foreign tax credit on the Form 1116 or choose to deduct the foreign income taxes on Schedule A, but not both.

In addition, the foreign tax credit limitation is there to prevent an offset of U.S. income taxes on U.S. income because the purpose of the foreign tax credit is to mitigate double taxation on foreign income, not the U.S. income. And the foreign tax credit limitation is a lesser of the qualified foreign taxes paid or accrued or the U.S. tax on the foreign income. And one thing to always remember is the limitation must be calculated for each separate category of income.

And now I'll turn it over to Mary Ann to continue.

Thanks, Loretta. So all four tests must be met for the foreign tax to be creditable. Adjustments must be considered that reduce gross income in certain categories. The tax related to those reductions must also be considered.

The effective treaties must be also reviewed. Substantiation may be direct or secondary. Only the compulsory amount is creditable, and taxpayer must exhaust remedies to reduce tax liability. FTC carryback and carryovers are now memorialized on Form 1116 Schedule B. FTRs are now required to be provided on Form 1116 Schedule C. Turning it back over to you now.

Thank you so much. I want to say a special thank you to, Mary Ann and Loretta for those key points. And, just a huge thank you again to all three of our presenters for such a great webinar.

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