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Simple Example -- Filled-In Form 1116
Betsy Wilson is single, under 65, and is a U.S. citizen. She earned $21,000 working as a night auditor in Pittsburgh. She owns 200 shares in XYZ mutual fund that invests in Country Z corporations. She received a dividend of $620 from XYZ, which withheld and paid tax of $93 to Country Z on her dividend. XYZ reported this information to her on Form 1099-DIV.
Betsy elects to be exempt from the foreign tax credit limit because her only foreign taxable income is passive income (dividend of $620) and the amount of taxes paid ($93) is not more than $300. To claim the $93 as a credit, Betsy enters $93 on line 43 of Form 1040. (She can claim her total taxes paid of $93 because it is less than her "regular tax," shown on Form 1040 line 40.) She does not file Form 1116. However, she cannot carry any unused foreign taxes to this tax year.
If Betsy does not elect to be exempt from the foreign tax credit limit, she will need to complete a Form 1116 as follows.
Betsy fills in her name and social security number, and checks the box for passive income.
Part I--Taxable Income or Loss From Sources Outside the United States (for Category Checked Above)
Betsy writes the name of the foreign country in column A and shows on line 1 the amount of income ($620) and type of income (dividends) she received from XYZ. Next, since Betsy does not itemize her deductions, she puts her standard deduction ($4,550) on line 3a and completes 3b and 3c. Her gross foreign source income (line 3d) is $620 and gross income from all sources (line 3e) is $21,620. She enters $131 on line 6. Line 7 is $489, the difference between lines 1 and 6.
Part II--Foreign Taxes Paid or Accrued
Betsy checks the "Paid" box and enters $93 on line A, columns t an x and on line 8.
Since the income was reported to Betty in U.S. dollars on Form 1099-DIV, she does not have to convert the amount shown into foreign currency. She enters "1099 taxes" on line A, column (o).
Part III--Figuring the Credit
Betsy figures her credit as shown on the completed form. The computation shows that she may take only $61 of the amount paid to Country X as a credit against her U.S. income tax. The remaining $32 is available for a carryback and/or carryover.
Part IV--Summary of Credits From Separate Parts III
Because this is the only Form 1116 that Betsy must complete, she does not need to fill in lines 22 through 30 of Part IV.