So, I see it is the top of the hour, so let's get started. Welcome to today's webinar titled An Overview of the Foreign Tax Credit. We're glad you're joining us. My name is Brian Wozniak, I am a Stakeholder Liaison with the Internal Revenue Service, and I will be your moderator for today's webinar which is slated for 100 minutes. Before we begin, if we have anyone in the audience with the media, please send an email address to the address listed at the bottom of this slide and be sure to include your contact information and the news publication you're with.

And our Media Relations staff and Stakeholder Liaison can assist and answer any questions that you may have. As a reminder, this webinar will be recorded and posted to the IRS video portal in a few weeks and that portal is located at www.irsvideos.gov. And please note, continuing education credit or certificates of completion are not offered if you view an archived version of our webinars on the IRS video portal. Technology problems, in case you do experience a technology issue, this slide shows some helpful tips and reminders. Again, we posted a technical help document that you can download from the materials button on the left side of your screen and it provides the minimum system requirements for viewing this webinar along with some best practices and quick solution. Now, if you've completed and passed your system check and you are still having problems, then try one of the following. The first option is to close the screen where you're viewing the webinar and re-launch it. And the second option is to click on the gear icon. Now some of you may not see the gear icon, it depends on your web browser, but if you do have it, the gear icon will be in the top right corner of the slide and photo boxes. And when you click it, you'll be given two choices, you can select flash instead of HLS from the available media box. Now, we hope that you did receive today's PowerPoint in a reminder email.

But if not, you can download it by clicking on the materials button located on the left side of your screen as shown on this slide here. Closed captioning is available for today's presentation. If you're having trouble hearing the audio through your computer speakers, just click the CC, the closed captioning button on the left side of your screen, and this feature will be available throughout the webinar. Test your knowledge questions, during the presentation, we will take a few breaks to share knowledge-based questions with you. At those times, a polling style feature will pop up on your screen with a question and multiple-choice answers. You need to select the response you believe is correct by clicking on the radio button next to your selection and then click, Submit. And to ensure that you do receive the polling questions, you probably should take a moment now and disable your pop-up blocker if you have that on. You want to disable it so that you can answer the question. Now earlier, I talked about wanting to know what questions you may have for our presenters. If you have a topic-specific question today, you can submit it by clicking the, Ask Question, button. You simply enter your question in the text box and click, Submit. And please do not enter any sensitive or taxpayer-specific information or ask questions about specific situations because we cannot provide official guidance for individual situations in this type of forum. So, if you are just joining us, welcome to today's webinar, An Overview of the Foreign Tax Credit. My name is Brian Wozniak, I'm your moderator for today's webinar and now we're going to introduce today's speakers. First Brad Horton is a Revenue Agent in the Foreign Tax Credit Practice Network in the Large Business and International Division. Brad is a certified public examiner, a certified fraud examiner and has a Masters in Taxation as well as a Masters in Business Administration. Next, Jim Wu is a Revenue Agent in the Foreign Tax Credit Practice Network in the Large Business and International Division. Jim is a California licensed, certified public accountant and he has a Masters Degree in Taxation. So, with that, I'm going to turn it over to Brad to begin the presentation. Take it away, Brad.

HORTON: Thank you very much, Brian Hello, everyone and welcome again to this webcast: Again, my name is Brad Horton and I'm a technical specialist with the Foreign Tax Credit Practice Network of LB and I based out of Dallas, Texas. Our purpose here today is to basically give a very broad overview of the foreign tax credit and to discuss some concepts and ideas to consider when dealing with and computing the foreign tax credit. We're excited to bring this presentation to you today and we hope that you find it informative and practical. With that being said, let's take a look at the topics that we'll be covering during today's webinar. As we just mentioned, again, our purpose today is to give an overview of the foreign tax credit and discuss some of the concepts and ideas to consider when dealing with and computing the FTC. So, we'll cover these topics today. We want to be able to explain the impact of residency status on U.S. taxation, we want to be able to differentiation residency status under U.S. immigration law versus U.S. tax law, we want to be able to determine an individual's residency status for U.S. tax purposes, and we want to be able to describe the special tax rules that apply to dual status aliens. So now that we've covered our topics and objectives, let's get started. Let's start with some concepts here that you may already know, but it's always helpful to wrap our heads around this so we can start thinking in terms of the foreign tax credits and this helps us to get our FTC thinking caps on. So, as you know, U.S. citizens and U.S. residents are taxed by the U.S. on their worldwide income. For example, let's just say that a U.S. individual taxpayer goes to foreign country X for a two-year assignment and this individual has to pay taxes in country X since he's working there. However, since he's also a U.S. individual, he has to pay taxes on his worldwide income to the United States and as such, the country X income is taxed both by the U.S. and by country X. And this is what we refer to as double taxation. The foreign tax credit or FTC which is defined in IRC Section 901 is designed to relieve this double taxation which occurs when foreign source income is taxed by both the U.S. and a foreign country or countries. The FTC then reduces a U.S. taxpayer's tax liability by all, or part of the foreign taxes paid or accrued during the tax year. Furthermore, the FTC is generally limited to the lesser of the foreign tax paid or the U.S. tax on the foreign income. Let's take a look at the 2018 Form 1040, particularly lines one through seven. Now, the form is revamped from tax year 2017 due to the changes that came about as a result of the 2017 Tax Cuts and Jobs Act. Now, this is the location on the tax return where U.S. citizens and residents are to include their worldwide income. What that means is that in these lines of the Form 1040 all U.S. sources of income and all foreign sources of income should be included here. In other words, if the taxpayer received U.S. source wages and foreign source wages, the total of both should be included on line one. Now, note that previously, lines 1 through 7 would have been covered on lines 7 through 22 and tax year 2017, but again, the TCJA changed up the presentation of the Form 1040. So, the point we want to make is this, get to know your taxpayer or your own situation if you're preparing your own return. You're going to want to ensure and understand where the wages compensation are being earned. And the same concept applies for investment activities and other sources of income such as taxable interest, dividends, alimony, capital gains and losses from Schedule D and this would include any foreign asset sales such as the sale of a home in the U.S. or a foreign country. Also, if the taxpayer rents a home in either the U.S. or a foreign country, the taxpayer includes the rental income and expenses from worldwide sources on Schedule E and then the total on page two of Form 1040. And again, the reason for this is because the U.S. taxes its citizens and residents on their worldwide income. So, we want to make sure we include all domestic and foreign source income.

Now, since the U.S. taxes on worldwide income sources, that's the ultimate reason that the foreign tax credit exists. Now, as you can see on this slide, this is both Schedule 3 and page two of the 2018 Form 1040. The foreign tax credit is now reported on line 48, of Schedule 3 and then ultimately reported on line 12 of Form 1040 as denoted by the two red arrows. This is again in contrast to the previous year and years where the foreign tax credit was reported on line 48 of page two of the Form 1040. Another item of importance to note is that if the FTC is larger than a taxpayer's liability, then there are carry-back and carry-over provisions that exist for this situation as applicable. Also note that the FTC is a non-refundable type of credit. Let's now shift our focus and talk about some of the elections that taxpayers can make in regards to foreign taxes paid. Now while this particular issue might not apply to any or all of your situations, this is an area where we've seen significant non-compliance over the past few years and therefore, we need to address it. Again, taxpayers have election options when it comes to the foreign tax credit. In essence, taxpayers can make an annual choice to elect either the foreign tax credit or to deduct foreign taxes as an itemized deduction. Taxpayers may claim a credit in one year and a deduction the following year or vice versa, but they just can't do both on the same foreign taxes in the same year. So, if your taxpayer or client chooses to claim a deduction for foreign taxes, then he or she must itemize deductions while attaching a completed Form 1116 to the U.S. tax return which constitutes an election to claim the foreign tax credit. Note that if the taxpayer chooses to claim a credit, he or she does not have to itemize. The taxpayer will then be allowed to use the standard deduction if he or she prefers it to itemizing. Now, if a deduction is taken in lieu of the credit then the credit carry-back of 1 year or carry-over of 10 years is lost for that particular year. More times than not, the credit will be more beneficial than the deduction because credits reduce taxes on a dollar-per-dollar basis whereas deductions do not. But there are situations where claiming the deduction instead of the foreign tax credit would be more beneficial. Again, when you're preparing tax returns for your clients or for yourselves, make sure not to claim both a deduction and a credit for the same foreign taxes paid. Also, keep in mind that in limited circumstances and if taxpayers meet certain thresholds, taxpayers may not have to file Form 1116 to claim the foreign tax credit. Here's a visual illustration of the top part of Form 1116 as well as a portion of part one for tax year 2018. Currently, there are seven categories of income, but in tax years before 2018, there were only five categories of income. However, due to the new tax act, the TCJA, starting in 2018 we have two additional categories, the Section 951 Cap-A income category and the foreign branch income category. Now, these two categories are going to be more common on the business side of the foreign side tax credit as reported on Form 1118 and then also for taxpayers with larger amounts of assets. Now, ultimately, a discussion of these two new categories of income is beyond our scope for today, but we just wanted to bring them to your attention. Even with the implementation of the TCJA, the two main categories of income that we see are the passive category income and in general category income. And this was the case before the TCJA and it's the case after the implementation of the TCJA as well. When you're preparing returns with FTC issues, it's very important to check and confirm that the taxpayer has not included general category type of income in the passive category income, et cetera. Also, keep in mind that limitations must be calculated separately for each of the seven categories of income or baskets of foreign source income. And according to IRC Section 904-D, the purpose of each separate FTC limitation calculation for each category of income is to prevent the distortion of the foreign tax credit by permitting credits on very highly taxed categories of income from offsetting the U.S. tax on lower taxed income. For example, in the passive category, taxpayers should only report passive income and foreign taxes paid in relation to that passive income. If a taxpayer has any unused excess passive foreign taxes, then he or she must carry back for 1 year and then carry forward for 10 years until he or she has enough foreign passive income to absorb the excess in the passive category income. But passive carry forward can't be used to offset other categories of income and vice versa. Now, this limit treats all foreign income and expenses in each separate category as a single unit and limits the credit to the U.S.

income tax on the taxable income in that category from all sources outside the United States. So please note that the form starts by saying the following, use a separate Form 1116 for each category of income listed below. See categories of income and the instruction. Check only one box on each Form 1116, report all amounts in U.S. dollars except where specified in part two below. Taxpayers must separate the seven types of categories of income into separate forms.

So, with that, I believe it is now time for our first polling question, so I'm going to turn this over to Brian to administer the question. Brian? WOZNIAK: OK, thanks, Brad. And while we're queuing up that question, a couple of our participants did ask Brad that you just double check your mic, there were apparently a couple of times where you just faded in and out. So, you can double check that during our polling question. And here is our first polling question of the day. With the implementation of the Tax Cuts in Jobs Act, how many categories of income are now listed on Form 1116? So, everyone, please take a moment and click on the radio button you believe most closely answers this question. And you need to answer it to show you're participating.

So, based on the information that Brad just shared, do you think the correct answer is that there are four categories of income listed on Form 1116? Answer B is five categories, answer C is six categories or answer D, seven categories. And I'm going to give everyone just a few more seconds.

Again, make your selection, click "Submit" and we're going to get ready to stop the polling, so let's go ahead. We're going to stop the polling now. We will share the correct answer on the next slide. And the correct response is D, there are seven categories of income currently listed on Form 1116. Now, I do see that 76 percent of you responded correctly. That's pretty good, but Brad, do you want to elaborate on those categories of income just a moment or two for our participants? HORTON: Yes, certainly, Brian. And thanks for bringing that to our attention.

So, we want to remember that previously, before the enactment of the TCJA, there were five categories of income, all right? So, we had general category and passive category being our most prevalent before and after. But with the addition of the TCJA, for tax years 2018 and going forward, we now have seven categories of income with the addition of the Section 951 Cap-A category and also, the foreign branch category of income as well. So just remember, I'd say just remember that with the TCJA, we now have seven categories of income on Form 1116 whereas previously we had five categories. Brian? WOZNIAK: OK, great. Thanks for clearing that up and I think we are going to move into it. I'll turn it back to you. I think are we going in for the Section 951A income now? HORTON: Yes, Brian, as a matter of fact we are going to discuss that right now. So, let's now turn our focus and attention to some of the less common categories of income. Right, so first, again, we have category A which is Section 951A income. As we mentioned just a bit ago, the 2017 TCJA created two separate income baskets for foreign tax credit, Section 951 Cap A which is referred to as GILTI and also the foreign branch income. GILTI is the acronym for Global Intangible Low-Taxed Income and I can almost look through my computer and see all your faces, the word GILTI just has a sinister sound to it, doesn't it? So, you can see we at the IRS obviously do have a sense of humor. Now, the applicable code sections are listed on the slide.

For tax years beginning after December 31st, 2017, the definition of a U.S. shareholder of a controlled foreign corporation is expanded to include U.S. persons who own 10 percent or more of a total value of shares of all classes of stock of such foreign corporation. Prior to this change, 10 percent or more ownership only applied to the total voting power of all classes of the CFC's stock. See Internal Revenue Code Sections 951B and 958B for more information. One thing to note regarding GILTI income is that unused FTC of GILTI is not eligible for carry back or carry over as is the case of the other categories of income. So next, we have category B, which is foreign branch income and also one of the new categories that was created. So, tax years that begin after December 31st, 2017, foreign branch income, the other new category of income must be allocated to a specific foreign tax credit basket. Foreign branch income is the business profits of a U.S. person which were attributable to one or more qualified business units in one or more foreign countries. The Internal Revenue Code Section 904B, passive category income however is not part of the definition of foreign branch income. And again, these two new categories are going to be seen more on the Form 1118 for business entities and even so taxpayers with larger assets and more complex business structures. However, we wanted to make form 1116 as uniform as possible to Form 1118 and we wanted to update you guys on the changes as they apply to the FTC. So now, we have Category E which is IRC Section 901J income. No credit is allowed for foreign income taxes imposed by and paid or accrued to certain sanctioned countries. To ensure that FTCs for these taxes are not claimed, income derived from each such country is subject to a separate FTC limitation. Therefore, the taxpayer must use a separate Form 1116 for income derived from each such country. Now, because no credit is allowed for taxes paid to sanctioned countries, the taxpayer would generally complete Form 1116 for this category only through line 17. Keep in mind that even though FTCs are now allowed for these taxes, the taxpayer can claim an itemized deduction for them in some cases. See publication 514 for a detailed list of these countries. Now, let's talk about category F which is certain income resourced by treaty. If a sourcing rule in an applicable income tax treats U.S. source income as foreign source and the taxpayer elects to apply the treaty, the income will be treated as foreign source. It's important to remember that the taxpayer must compute a separate foreign tax credit limitation for any such income for which the taxpayer claim benefits under a treaty using a separate Form 1116 for each amount of resource income from a treaty country. In these instances, Form 8833 treaty-based return position disclosure under IRC Section 6114 can be utilized by the taxpayers. Now, this takes us to category G, lump sum distributions. Now, you can take a foreign tax credit for taxes you paid or accrued on a foreign source lump sum distribution from a pension plan. Special formulas may be used to figure a separate tax on a qualified lump sum distribution for the year in which the distribution is received. And I'd refer you to publication 575 for more information. Please check IRC Section 409 Cap-A for lump sum distributions from pension plans. So now that we've talked about the seven categories of income, again, the general and passive category being by far the most common, let's talk about what U.S.

source income and foreign source income are. For the Internal Revenue Code, or IRC, speaks of the sourcing of income, it's referring to the origin of the income as being earned either in the U.S. or in a foreign country. Before taxpayers can figure their taxable income in each category from sources outside of the U.S., they must determine whether the gross income in each category is from U.S. sources or foreign sources. Now, U.S. source income is income determined by tax law to be from within the U.S. and this includes 50 states, the district of Colombia and the territorial waters of the U.S. It does not include the possessions and territories of the U.S.

or the air space over the United States. On the other hand, foreign source income is income determined by tax law or applicable treaty to be earned outside the U.S. All right, so a foreign country for those purposes 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. Why is this information about sourcing important? Important because we should ensure that the taxpayer has only included foreign source income on Form 1116. As we mentioned a bit ago, the two most common categories of income for FTC purposes are the passive and general categories. Listed on the screen now are some of the more common types of passive and general category income. In terms of sourcing, it's the residence of the payer that generally determines the source of interest income. IRC Section 861(a)2 provides that dividends from domestic corporations are U.S.

source income whereas dividends from foreign corporations are foreign source. Compensation for labor or personal services is income from sources inside or outside the U.S. depending on where the labor or services are performed. Note that compensation includes wages, tips, salaries and other employee compensation as well as earnings from self-employment. If compensation from labor or personal services is earned both inside and outside the U.S., an allocation must be made under treasury regulation 1.861-4(b). Sales of real property are sourced based on the location of the property and a sale of personal property is sourced based on the seller's tax home.

Further, note that partnership income retains its character when it flows through to the individual's Form 1040. If 60 percent of the partnership income is foreign source, then 60 percent of the distribution is foreign source, and this is true even if the partner only performs services and his role as a partner in a foreign country. But here's a bit of caution, guaranteed payments paid to partners are treated differently. IRC Section 707C and revenue ruling 81-300 and 81-301 provide rules regarding foreign earned income from guaranteed payment. Now, the source of guaranteed payments for services rendered is where the services were performed. A guaranteed payment received by a partner is considered foreign earned income if it is fixed in amount, it's paid services performed by the partner in a foreign country and payable regardless of whether the partnership has any profit. If the amount received does not qualify as a guaranteed payment, and a partnership agreement does not specify otherwise, it is foreign earned income only to the extent of the partner's distributive share of the total earned income of the partnership which is derived from foreign sources regardless of where he or she works. After having discussed the different categories of income, let's move our discussion a little further down the Form 1116. So one thing we need to be aware of is that one of the more common adjustments that a taxpayer needs to make under the general category of income to the gross income from foreign sources on line 1A of the 1116 is for the foreign-earned income exclusion or foreign housing exclusion if applicable, the idea of being if a taxpayer has excluded a portion of his or her income from taxation then this income should not be included on line 1A. Now, this is similar to reducing worldwide income by the amount of the FEIE on the front page of Form 1040. So, if a taxpayer claims the foreign-earned income exclusion, he or she will file Form 2555 or Form 2555-EZ, whichever applies, and then attach either form to the Form 1040. And note these forms are used to report foreign-earned income exclusions under IRC Section 911, which includes items such as wages and self-employment income earned outside of the U.S. So now, this brings us to another polling question. And I'm going to hand the mike over to Brian to administer. Brian? WOZNIAK: OK. Thank you, Brad. Let's take a pause in the action here.

That was a lot of information to digest. Before we get into the first polling question, just one item, Brad, we still do have a couple of folks who say that your audio is fading in and out.

Some people can hear it, some can't. So, I think we're going to try to troubleshoot a little during this session. The second thing I wanted to comment on is many of our participants today are stating that they are not seeing the polling questions. Now, again, you will need to turn off or disable your pop-up blocker and how you go about the specifics of that is going to depend to a large extent on which operating system, you have, you use, and things of that nature. But ultimately and you might need to click the help button to see how to turn off the pop-up blocker, because they are pop-up questions. And you do need to participate in order to get the CE. This is how we track it. So, with that, try your best. Let's move into our next polling question, which is, what is the difference between U.S. source income and foreign source income? Is the answer, A, there is no difference between the two; answer B, foreign source income originates from a foreign country whereas U.S. source income originates from the U.S.; answer C, U.S. source income originates from a foreign country and foreign source income originates from the U.S. or D, U.S. source income is determined by tax treaties where foreign source income is only determined by internal tax laws of various countries. So, again, we need you to just take a moment, select the answer you believe most closely answers it. If you do not get the pop-up blocker, send it to us in the tax chat in the ask question, just say the answer to polling question two is, B, whatever, C or D, et cetera. And we're going to give everyone, oh, let's just give them a few more seconds to answer to question what is the difference between U.S.

source income and foreign source income? And I think we're going to go ahead. Let's stop the polling now. And we will share the correct answer on the next slide And the correct answer is B, foreign source income originates from a foreign country whereas U.S. source income originates from the U.S. That seems pretty straightforward. And I do see that we have 88 percent of you responded correctly. And that is a great correct response rate. So, Brad, are you still with us? Are we working through any of those audio issues? Or how are you making out? Because I think we're going to move on and talk about the Form 1116 next. Is that right? HORTON: That is correct. Doing everything I can with the audio. It's a landline, so if that's not working then it may be on the other end. I'm not entirely sure. But certainly, I hope that everything is coming as clear as possible. WOZNIAK: Sounds good now. We'll keep moving forward. Take it away. HORTON: All right. Thanks. Let's look at this example, to help us better understand how the FEIE and the FTC interplay with one another. All right. So, let's assume that taxpayer D is filling out Form 1116 for his 2018 tax return after he just returned from country XYZ, where he was a self-employed individual. His foreign self-employment income was $120,000 of which $80,000 qualified for the foreign-earned income exclusion as reported on Form 2555. In this case, he would enter the name of the foreign country as XYZ on the 1116 and would enter 40,000 on line 1A of the Form 1116, which is the difference between the foreign self-employment income of 120,000 and the amount of 80,000, which he excluded under the foreign-earned income exclusion.

This is a very important step and it's also important to remember that any foreign taxes related to the excluded amount of $80,000 should be taken out from the foreign total foreign taxes paid, So, if we're still talking about line 1A of the Form 1116, but now we want to talk about an issue that may be applicable to the passive category of income. So, in some instances, taxpayers may need to make an adjustment for rate differential if a taxpayer has foreign source qualified dividends or foreign source capital gains, including any foreign source capital gain distributions or losses. Now, the foreign source qualified dividends are the amount that the taxpayer reports on Form 1040, line 3A or Form 1040-NR, line 10B. If a taxpayer has any foreign source qualified dividend, he or she may be required to adjust the amount of those qualified dividends before he or she takes them into account on line 1A of Form 1116. Taxpayers may also have to make additional adjustments to line 1A. For instance, if a taxpayer has any capital gains or capital losses, and if it includes any capital gain distributions, he or she may have to make certain adjustments to those gains or losses before taking them into account on line 1A for gains or line 5 for losses of Form 1116. And, again, just FYI, these line numbers reflect the 2018 Form 1116 which has been updated with the changes resulting from the TCJA. All right, so let's move a little further down to Form 1116 and talk about some of the things that you need to be aware of, particularly definitely related expenses. Examples of definitely related expenses are things like self-employment expenses for self-employed individuals. In cases that have large definitely related expenses, there is a good chance that these large amounts are likely flowing through from partnerships. In such cases, tax return preparers most likely will need to prepare a spreadsheet in order to tie down the definitely related expenses. Basically, the less expenses, the more foreign taxable income and, of course, the more foreign taxable income, the larger the foreign tax credit. Examples of expenses that are not definitely related to a particular gross income, again, they're not related specifically to either foreign or U.S.

income are the standard deduction or certain itemized deductions. And examples of not definitely related itemized deductions are medical expenses, real estate taxes and general sales taxes from Schedule A. So now, let's summarize some of the items that are important to part one of Form 1116. Let's remember the following. That the limitation or limitations must be calculated separately for the seven categories of income. Each of the seven listed categories of income require a separate Form 1116. Additional Forms 1116 are required when a taxpayer has paid or accrued tax no more than three foreign countries. Also, ensure that the taxpayer in question has properly allocated deductions and losses to the separate categories of income and remember that an incorrect allocation of income to the proper category of income will result in distorted FTC amounts. So now, I'm going to switch the microphone over to my colleague and my friend Jim Wu to take us to the next part of the section. Jim? WU: Thank you, Brad. And I hope everyone can hear me clearly. So, moving on, let's talk about something that's very important when computing the foreign tax credit. Generally, for a foreign tax to qualify for the FTC, all four of the following tests, the tests that are on the slide, must be met. First, the foreign tax must be imposed on the taxpayer. A credit can be claimed only if foreign taxes are imposed on a taxpayer by a foreign country or a U.S. possession. A U.S. possession is such as Puerto Rico, for example. And a tax withheld from wages is considered imposed on the taxpayer. Next, test number two, foreign tax must be paid or accrued by the taxpayer. Generally, a taxpayer can claim the credit only if they paid or accrued the foreign tax to a foreign country or U.S. possession.

There are some instances in which taxpayer can claim the credit even if they did not directly pay or accrue the tax. And I'm going to give you three just three examples, the first one is if a joint return is filed, spouses can claim a credit based on the total foreign taxes paid or accrued by either spouse. Second example, partner or S corporation shareholders, partners of a partnership or S corporation shareholders can claim foreign taxes passed through to them from a flow through entity. And the third example is a beneficiary of an estate or a trust and they can claim foreign taxes paid or accrued by the estate or the trust. But for an extensive list please see publication 514. And the third test on the list here is that the foreign tax must be legal and actual tax liability. What does that mean? This means that the amount of foreign tax that qualifies for the credit is not necessarily the amount of tax withheld by the foreign country. And this is an extremely important concept that is oftentimes missed. For example, if the U.S. has a tax treaty with a foreign country, the actual and legal tax liability is a tax rate, specified or stipulated in a tax treaty, not the amount of tax that is actually withheld.

Even if the amount actually withheld differs from the treaty rate. So, we need to know first of all if a tax treaty exists to ensure that the amount of tax used for the FTC computation is based on the treaty rate, not the statutory rate of the foreign country. We'll talk a little bit more about this issue in a few minutes and give an example. Another important point under test number three is that the FTC cannot be taken for income taxes paid to a foreign country if it is reasonably certain these foreign taxes will be refunded, credited, abated, rebated or forgiven, if a claim was made with that foreign country. And the regulation says that it is not reasonably certain that an amount will be refunded, credited, rebated, abated, or forgiven if the foreign tax is not greater than a reasonable approximation of the final tax liability to that foreign country. Finally, number four, number four test, foreign tax must be an income tax or a tax in lieu of an income tax, whether a foreign levy with an income tax that is determined independently to each separate category of foreign levy. A foreign levy is considered an income tax if it meets both of the following requirements. Number one, it is a tax that is it must be paid and there is no specific economic benefit to the taxpayer for paying it. And number two, the predominant character of a foreign tax is that of an income tax in U.S. sense or based on U.S.

tax principles. So, to expand a little bit on this point, a foreign levy is considered a tax eligible for a foreign tax credit if it is a compulsory payment. And this means that the tax is not voluntary, and the taxpayer does not receive a specific economic benefit in exchange for paying the tax. The specific economic benefit could include goods, property or services. All right. There are various foreign taxes for which taxpayers cannot take the foreign tax credit.

Let's go over some of the common ones that taxpayers might erroneously include in part two of the Form 1116, fines, penalties, interest, custom duties and other similar obligations are not creditable or deductible foreign taxes. On the other hand, the taxpayer may be able to take a business deduction under code section 162 for some of the items that were just mentioned. Fines and penalties, however, are never creditable or deductible under any circumstances.

Additionally, excise and inheritance taxes are not creditable taxes for the foreign tax credit.

What about Social Security type of taxes, both paid or accrued to a foreign country? Well, if a foreign country has a totalization agreement with the United States, Social Security type of taxes will not qualify for either the FTC, the foreign tax credit or the Schedule A deduction.

If a taxpayer paid a tax that appears to be a Social Security type of tax, but the foreign country is not on the list of the totalization agreements with the U.S., then the taxpayer needs to make sure that tax otherwise qualifies at the creditable foreign tax under four tests that we just discussed. So, at this time, I'm going to turn over to Brian. I think he has a polling question for us. Brian? WOZNIAK: I do, sounds good to me. Thanks, Jim. OK, audience, here is our third polling question. The question is all of the following are non-creditable taxes for the foreign tax purposes except, so again, all of the following are non-creditable taxes for foreign tax credit purposes except, is the answer, A, fines; B, penalties; C, income taxes or D, value-added taxes? So, again, select the answer that you think best answers the question and submit it. And we'll give everyone just a few more moments to make their selection. And I think just another second or two, let all the responses come in and we will go ahead and stop the polling now and share the correct answer on the next slide. And the correct answer is C, income taxes. Income taxes are creditable for the foreign tax credit whereas fines, penalties and value-added taxes are not. And I see that 83 percent of you responded correctly, so again, another great response rate. And with that, I'll just turn it back over to you, Jim . WU: Thanks, Brian. Now, let's continue with just a few more non-creditable foreign taxes. Many countries charge a value-added tax commonly referred to as a VAT tax. That was on the last polling question. The VAT tax or a goods and services tax or GST is a form of consumption tax.

So, from the perspective of the buyer, it is a tax on the purchase price, similar to a state or local sales tax here in the United States. These taxes are not creditable for FTC purposes.

Another type of taxes is the wealth tax, which is common in some European countries. The wealth tax is generally not considered an income tax and therefore not creditable to the foreign tax credit. On the other hand, if a wealth tax is paid or accrued, taxpayers may be able to segregate and establish that at least a portion of that tax is held for the production of income within the meaning of code section 212, code section 212. If this can be established, the wealth tax could be allowed as a deduction under code section 164. Keep in mind that taxes based on the value of assets such as property taxes are not creditable to the FTC. Finally, taxpayers cannot claim foreign tax credit for foreign income taxes paid or accrued to any country if the income giving rise to the tax is for a period that is referred to as the sanction period during which the Secretary of State has designated that country as one that has that repeatedly provides support for acts of international tourism. The United States has severed or does not conduct diplomatic relations with that country, further United States does not recognize that country's government and that government is not otherwise eligible to purchase defense items or services under the Arms Export Control Act. However, taxes paid to such countries may be claimed as an itemized deduction. Tax treaties, OK, as we mentioned earlier sometimes taxpayers include a higher statutory withholding rate of foreign taxes paid or accrued in their FTC computations rather than the lower treaty rate. Creditable foreign taxes meaning the amount of taxes that are allowable for the FTC are limited to the lower treaty rate even if taxes were withheld at a higher statutory rate of that foreign country. So, the question is do we care if a taxpayer includes the taxes that were withheld at the higher rate, the higher statutory rate if a treaty rate exists. And the answer is yes, we do care Even though taxpayers may find that it's much easier to claim the higher rate, a higher statutory tax withheld not having to file for a refund with a foreign country, therefore if a lower treaty rate applies, taxpayers are required to claim the treaty rate. And this is not a choice. But what is a choice is whether the taxpayer decides to file a foreign return to request a refund of the excess taxes withheld above the treaty rate.

Again, taxpayer cannot claim the foreign tax credit with the United States based on foreign tax withheld at the higher rate because that represents, the higher rate represents, does not represent the legal natural foreign tax liability. The treaty rate is the legal liability. So, in summary, because the excess amount of tax and over the treaty rate is considered noncompulsory, therefore not a legal tax liability, it is not creditable with the foreign tax credit. Now, we're going to walk through a simple example of the statutory withholding rate versus the treaty rate. In this example, the amount the taxpayer includes in part two of the Form 1116 should be $150, not the $350. Even though $350 in taxes were actually withheld, based on that country's country A statute, the treaty rate of 15 percent on the $1,000 interest income is $150. If the taxpayer claimed $350 for the FTC, which is the actual amount withheld that will be erroneous, it will be up to the taxpayer to file a claim for refund for the difference of the $200 with foreign country A as this amount represents a noncompulsory payment.

This is a simple example with small numbers, but it does underscore the importance of claiming the treaty rate when the treaty applies. And now let's pause here for our next polling question.

Brian, do you have another question for us? WOZNIAK: I do, Jim. Our next polling question is being queued up right now So, our fourth polling question is which of the following is not a requirement for a tax to be considered creditable and thus allowable to be used to compute the foreign tax credit? Is the answer, A, the tax must be imposed on the taxpayer; B, the taxpayer must have paid or accrued the tax; C, the tax must be the legal and actual tax liability, or the amount withheld or answer D, the tax must be an income tax or tax in lieu of an income tax? So, everyone, just take a moment, click on the radio button you believe most closely answers the question. Submit your answers and we'll give everyone just a few more seconds to make their selections. And we'll go ahead. Let's stop the polling now and share the correct answer on the next slide. And the correct response is C. The tax must be the legal and actual tax liability, or the amount withheld And again, we are looking for one that was not a requirement for the tax to be considered creditable. And I see OK, we're sliding here. We must be losing them a little, Jim Only 56 percent of our participants got that correct So, Jim, could you just take a few moments and elaborate on that before we go into currency translations rules? WU: Yes. I'll be glad to, Brian. I think that last question may be a little bit tricky because the, although the correct answer is C, the first part of that answer, the tax must be legal, actual tax liability is correct and that is one of the four tests. However, what comes at the end or the amount withheld. That is not necessarily correct because as we just mentioned with the treaty scenario that just because a certain amount has been withheld doesn't mean it is a legal liability if a treaty, if there's a tax treaty with that foreign country. So, I apologize. I think this question might be a little bit tricky. So, if that answer C has the, it doesn't have the last part, or the amount withheld, then it will be the, will be one of the four tests. As the question is constructed, B will be the best answer to that question. I hope that helps a little bit. WOZNIAK: Yes, that's great. Let's move along. WU: OK. So, moving on down the Form 1116, let's now talk about part three of the Form 1116. We've covered part one and part two.

Now, let's talk about part three. We mentioned this earlier, but it's something we need to expand upon a bit because this issue is very important and it's easy to miss. Taxpayers must reduce their foreign tax as paid or accrued by the portion that is allocable to any foreign-earned income exclusion for the foreign housing exclusion of Form 2555 or the Form 2555-EZ. Not doing so would give taxpayers an additional benefit they're not entitled to. The taxpayer whose foreign earned income is completely excluded do not take a credit for any of the foreign taxes paid or accrued on that excluded foreign earned income, if however only a part of the foreign-earned income is excluded and the part that is not excluded under code section 911 can be used to compute the foreign tax credit. The point here is that taxpayers cannot take a credit for the foreign income taxes allocable in the excluded portion of income of U.S. taxation because in this case there's no double taxation. The reduction or adjustment to the foreign tax in this case is reported on line 12 of the Form 1116. The adjustment on line 12 is an off the form computation, meaning the details are not shown on the form itself, not on the Form 1116.

Taxpayers should attach a schedule for their tax returns clearly showing the detail. And we will refer you to Form 1116 instructions or the publication 514 for more information. OK All right. So, what we're going to talk about here is carryback and carryover. OK. So, going back to the form part three, line 10. OK. As was mentioned earlier, the FTC limitation must be computed separately for the seven separate categories or baskets of foreign source income. It's the same concept here in dealing with carrybacks and carryover and it's very important that you double check. Taxpayer must compute or calculate carrybacks or carryovers separately in each category of income, to make sure you maintain a schedule to track the carryback and carryover and verify that they're being claimed in the correct category or basket of income. Right. When FTC is limited in a particular year, foreign taxes that cannot be used in that year, may be carried back or carried over. Code Section 904C provides the ordering rules by the carryback and carryover of the unused foreign taxes. Number one, first, any unused foreign taxes in a particular tax year must be carried back one year, then any remaining unused foreign taxes must be carried over to the next ten years in a progressive order. Thus, under the rule under current law is back one and forward ten. And there's no election to forego the carryback. Carrybacks are used first and then any remaining unused portion is carried over on a first in-first out basis so that the carryovers originating from the older tax years are used before those originating in a later tax year. Once the excess foreign taxes are used up in this manner, they expire. And for this purpose, a period of less than 12 months of which a return is made, for example, a short tax year is considered a full tax year. All right. Limitation. This segues nicely to the limitations of the foreign tax credit. As you could see, the FTC limitation provides that the total amount of the taxpayer's FTC may not exceed the taxpayer's U.S. income liability attributable to foreign source taxable income. And that's what this fraction does here you see on the slide. The U.S. tax income liability here is determined with regard to the credit. Foreign source taxable income that is any item of income from outside the United States is the numerator of the 904A limitation and the worldwide taxable income is the denominator in this fraction. The taxpayer's FTC cannot be more than his or her total U.S. tax liability which is reflected on line 20 of the Form 1116. The U.S. tax liability based on worldwide income is multiplied by this fraction, this limitation fraction to calculate the FTC limitation. In other words, the taxpayer takes the total foreign source taxable income over the total worldwide taxable income before any exemptions and then multiplies that fraction by the U.S. tax liability before any credit and the result is the amount of U.S. tax against which the taxpayer may claim the FTC. This is the FTC limitation and must be computed for each separate category of income.

That's why you should be very careful to source income correctly between foreign source and U.S.

source. And please keep this formula, this limitation formula in mind, for each category of income as we cover the next topic on the next slide. Now, for the last part of the formula limits is part four which is the summary of credits on separate Form 1116 on lines 23 to 30. So, the taxpayer completes line 23 to 29 in part four, only if the taxpayer completes more than one Form 1116 when there is more than one category of income. So essentially, the taxpayer pulling numbers on all the completed Form 1116s and placing them on the summary. Taxpayer completes part four on only one Form 1116, the one with the largest amount entered on line 22 or the one that the largest credit to summarize the credits computed in all the Forms 1116s. Now, were going to change gear a little bit and talk about substantiation requirements. In a perfect world, taxpayer has filed and paid all foreign taxes and substantiates those foreign taxes paid. But if the foreign tax return is not available, the foreign tax has not been paid, let's say, the taxpayer is using the accrued method, the taxpayer must then submit a certified statement as listed on the slide along with excerpts from the taxpayer's account showing the amount of foreign income and foreign income and foreign tax accrued on the books, on the taxpayer's books as well as other information which are listed on the next slide. OK. So, we don't see this often but a bond, security bond, if a bond is required by the Internal Revenue Service, Form 1117, which is a one-page form, needs to be completed. The examiner or the taxpayer, I'm sorry, the IRS examiner should be able to provide some guidance if this is requested. And I'll refer you to IRM, Internal Revenue Manual 4.61.10.4 for more information on substantiation requirements and will repeat this for those of you who are taking notes, that's IRM 4.61.10.4. Obviously, if the taxpayer is using the paid method, the taxpayer should be able to produce support for the payment. And I think we just have time for one more polling question and I'm going to turn it back to Brian. WOZNIAK: OK. We do have time, just enough, for one more polling question. So, our fifth polling question of the day is what is the purpose of the FTC limitation? Is it answer A, to ensure that the total amount of a taxpayer's foreign tax credit does not exceed the U.S.

income tax liability? Answer B, it's impossible to know what the true purpose is. Answer C, to ensure that a taxpayer's foreign tax credit is larger than their U.S. tax liability. Or answer D, to help taxpayers properly compute their foreign tax credit amount. So, again, please take a minute, review the questions and possible answers and then click in the radio button you believe most closely answers the question. We're going to give everyone just another few seconds to make their selections and submit them. And with that, let's go ahead and stop the polling now and we will share the correct answer on the next slide. The correct response is answer A, the purpose of the FTC limitation is to ensure that the total amount of a taxpayer's foreign credit, tax credit does not exceed the U.S. income tax liability. And with that, I can see that 71 percent of our audience got that correct. That's pretty good. But, Jim, I think maybe if you could just clarify that a little bit before we move on to some resources. WU: Sorry, I was on mute there.

OK. So, let's see what the question, what is the purpose of the FTC limitation. And the answer, of course, here is to ensure that the total amount of the taxpayer's FTC does not exceed the U.S. income tax liability and that's because the credit, the FTC, can never exceed what the taxpayer is paying to the United States. We are not in the business of subsidizing, in other words, another country's taxes. So, it's limited at what the taxpayer is paying to the U.S. and U.S. tax liability. WOZNIAK: OK. Thanks for that clarification, Jim. And before we move on, I would like to turn the microphone back over to Brad for a moment or two to just give some clarification. Brad, we've been asked to give some clarification on one of the previous slides, is that correct? HORTON: Yes, Brian. Thank you. There are actually a couple of clarifications that I wanted to make. I've been seeing questions coming in about it. And on slide 36, I believe that it says something about five categories of income, that should be seven.

Again, that's post TCJA should be seven categories of income. Obviously, that's a typo that was missed there. And another thing that I've been seeing a lot and I want to just clarify and that is the countries that we are using in this example like country Z, country XYZ, et cetera or in this webcast, those are purely fictitious, made up countries just for our purposes today.

Don't try and type in the country codes or anything when you're filling this out. But I just want to let you know, we made those up solely for today. We didn't want to single out any specific country or whatever, so we just kind of go with a neutral country, just a made-up country and we have a list of made up countries that we use from So, again, slide 36 should be seven categories of income there, I believe it's the second bullet point. And, again, all the countries we talk about today except for the United States, of course, are fictitious, made up countries just for purposes of this webcast. And thank you, Brian. That's all I have.

WOZNIAK: Ok. Thanks, Brad. That's good clarification. So, with that, let's move on and, Jim, how about some common resources for our audience that they can use? WU: Absolutely. WOZNIAK: Be careful, you might, OK. WU: Yes, absolutely. Can you hear me? WOZNIAK: We can. Thank you.

WU: Right. So, as you can see on this slide, some common resources are available and accessible when dealing with FTC issues. Publication 514 specifically addresses the FTC.

Publication 514 is sort of like the bible for FTC. And we have Publication 54 and obviously, Form 1116 and the form instruction. You can also go to the irs.gov website to download these resources for future reference. OK. On this next slide, we've cited the code sections 901 through 909, 901 through 909. These are the statutes dealing with foreign tax credit. And I know this is not on the slide, but you can know from our presentation today, sourcing rules are very important. And you can find the souring rules in IRC section 861 through 865, 861 through 865. We also have practice units available to the public dealing with FTC issues. These practice units can be accessed by going to, again, the irs.gov website and just put in the words practice unit in the search box and they will pop up. And now want to turn over back to Brian and I think we might have some time for questions from the audience. Brian? WOZNIAK: OK.

Thanks, Jim. A couple of items before we go to begin the Q and A, the question and answer session. First of all, I want to thank everyone for attending today's presentation on the topic of An Overview of the Foreign Tax Credit and Brad Horton and Jim Wu will stay with us to help answer those questions that you've already submitted. Now, if you haven't input your questions, there's still time, you can go ahead and click on the ask question button and then just simply type your question in and click, Submit. And another item before we start, we may not have time to answer all the questions submitted but we'll try to get to as many as possible. Also, if you are participating to earn a certificate and related continuing education credit, you will qualify for two credits by participating for at least 100 minutes from the official start time of the webinar, which means those first few minutes or so of chatting that we engaged in before the top of the hour does not count toward that 100 minutes, so sorry about that. And if you stay on for at least 50 minutes from the official start time at the top of the hour, then you will qualify for one credit. So, again, just that chatting, those few minutes of chatting right before we started the webinar will not count toward the 50-minute or 100-minute threshold. So, we have quite a few questions here. Let's just jump right into it. Brad, the first question we're going to have for you is can you claim the foreign tax credit and the foreign tax deduction on the same taxes. HORTON: Thank you, Brian. And that is a great question and I see we had several questions about this throughout. And the answer is no, you cannot, all right? So, say that you pay $500 in taxes to country ABC. All right. Those $500 of taxes to country ABC can either be used for the foreign tax credit or for the foreign tax deduction. You can't use the $500 for both the foreign tax credit and the foreign tax deduction. It's an either/or type of thing. Again, it seems like we've had a lot of maybe confusion over this because this is an area where we've had some exposure over the past few years and we wanted to get that cleared up.

Now, that doesn't mean to say you can't take the foreign tax credit and the foreign tax deduction in the same year; it's just on the same taxes, on the same income. So, if you have taxes on a different source of foreign income, you can claim the deduction on those, and you can also claim the foreign tax credit on those on a different set of taxes paid or different type of income. But you just can't you can't claim both the foreign tax credit and the foreign tax deduction on the same foreign taxes; it's either/or. Back to you, Brian. WOZNIAK: OK. Thanks for that clarification. And, Brad, I am going to queue another question up for you here, but I want to prep Jim on someone was asking for some clarification on slide 47 about the currency translations rules. So, while you take a look at that, Brad, the next question I have for you is what is the logic for the adjustments in the worksheet for line 18 on worldwide qualified dividends and capital gains. HORTON: OK. Another great question here. The logic behind that is to prevent the distortion of the foreign tax credit. I know it can get a little convoluted there on the worksheet, but basically the logic behind that is to make sure you're not benefitting by taking the foreign tax credit on U.S. taxes. Again, remember, the foreign tax credit is supposed to alleviate double taxation on foreign taxes. And so, that adjustment there, the logic behind that is to make sure we back out any different tax rates that could possibly distort the foreign tax credit and give taxpayers more of a benefit than they are entitled to.

And in case you haven't noticed, we at the IRS, we kind of frown on giving you more benefits than you're entitled to. That's pretty much the logic behind it. Again, that's just to make sure that you're not getting an additional benefit, due to a difference in tax rates in the U.S.

and foreign countries. So, I hope that answers the question and back to you, Brian. WOZNIAK: OK. No, that's great. Thanks for clarifying that. Jim, before I enter into the next question, did you have any clarifying points on slide 47 or shall we just move along? WU: What is the question on the slide? WOZNIAK: They were just asking for some information on it. They felt you didn't cover that in detail on the election to use the exchange rate on date paid and just the translations rules. WU: Yes. If the person posing the question has a specific question, I can try to answer that. WOZNIAK: OK. WU: I'm just not sure what the question is exactly.

WOZNIAK: No, you bet. We'll ask them. They can go back and resubmit it and we'll get to it later then. Let's go on, I have another one for you though here, asking Jim, what is the statute of limitations for filing an amended return to correct the foreign tax credit claimed on the original return, is it three years? WU: Yes. So, that's a very good question. And the normal statute of limitations is three years of filing a claim on the amended return. But there is an exception in this case. When you're amending a return that relates to a foreign tax credit issue, for example maybe on the original return you understated the foreign taxes and you want to make that correction, or any possible other issues on the Form 1116, you do have 10 years of statute limitation. So, the 10 years starts from the original due date of a tax year of a tax return without regards to any extensions filed. And the code section that relates to this is section 6511(d)3. So, it's 10 years statute of limitation. WOZNIAK: OK. That's great information. And, Jim, I'm going to continue with you, we have another question for you. They are simply asking where I can find tax treaties in plain language, they are hard to read exclamation point. WU: Yes. I totally agree, it's like reading a foreign language. But maybe for clarification, for each tax treaty, there is, accompanying the treaty, there is what is called the technical explanation. So, if you Google the tax treaty for a foreign country and you just add the words technical explanation and that sort of makes the reading a little bit easier. WOZNIAK: OK. That's great. Yes, you bet. Brad, a couple more for you. The next question is what is the amount of the credit that needs to file Form 1116. I'm reading them verbatim, so bear with me here. HORTON: OK. Thank you. And I think this goes back to earlier where we said there were some instances earlier in the presentation where we said that there were some instances when taxpayers would not need to file a Form 1116 in order to claim the foreign tax credit. And so, basically, what this is dealing with is a situation where the amount of the foreign tax credit is under a certain threshold, a de minimis amount. And I believe off the top of my head that that amount $300 for individuals, single taxpayers and $600 for individuals married filing jointly. But basically, it all, and you might want to double check that just to make sure. It's been a few weeks since I've actually seen those numbers.

But there are, basically, it goes back to a de minimis amount. And so, anything over that threshold then you need to file the 1116; anything under that, you can still claim the foreign tax credit without actually filing a Form 1116. All right. So, thank you very much for the question. WOZNIAK: You bet. And, Brad, I have another one for you here. We're going to ask is the taxpayer required to stay with the choice they made after the first year. HORTON: All right. So, if I understand this question correctly, I believe that it is, that they are asking, say, they've taken the foreign tax credit in one year, let's say, in 2018 they claimed the foreign tax credit. So, basically, what constitutes your election for claiming the foreign tax credit is you just attached a Form 1116 to your tax return and that's your election. Certain other elections, you have to, there's a certain form you have to make like you're taking a treaty-based position, certain things you have to file a specific form saying I'm making this declaration, I am making this election. But with the foreign tax credit, you don't have to do that. You just simply file the Form 1116. So, you can claim the foreign tax credit 1116 and then you don't have to do it in the next year. You can claim the deduction back and forth, vice versa. It's just, again, it goes back to that issue of not taking a deduction and credit on the same foreign taxes. So, yes, you can switch your election in the following years and vice versa. So, hopefully that answers the question if I understood it correctly. WOZNIAK: No, that does it. It is year-to-year, you can change it, you clarified that. Jim, I'm going to turn it back to you, question on carrybacks. Does an election need to be made to not carry back or not to carryback? WU: Yes. There is no election available foregoing to carryback such as NOL, Net Operating Loss. You do have that election or that option, but for a foreign tax credit carryback, there is no election available to forego, so you must first carry back the excess credit to the year, to prior year, prior tax year. WOZNIAK: OK. WU: And then you can't...

WOZNIAK: That's not even really an option then. WU: Yes, you can't, I mean, if when you carry it back one year and it still cannot be used, obviously, you just move forward to the next succeeding tax year. WOZNIAK: OK. And another question for you, again, just reading them verbatim. The question is if someone works out of the country, outside the U.S. for a full year and there's no U.S. income, is he taxed to the United States on the foreign income, the person is married. WU: Yes. So, generally speaking, this person I assume is a U.S. taxpayer, either a U.S. citizen or a U.S. resident so, generally then he or she is taxed on his or her worldwide income meaning that even though taxpayer do not earn any income in United States, however, the taxpayer did have some income in a foreign country which is subject to foreign taxation, but that income is likewise subject to U.S. taxation. Now, that's a general answer. There might be some exceptions in the tax treaty, so I'm just providing a general answer here that U.S. taxpayers are subject to worldwide taxation. WOZNIAK: OK. And, Jim, I'm going to transition back to Brad now. Thanks for that clarification. And, by the way, we did get the follow up on that currency translations rules. They are asking that you cover again essentially the slide in its entirety, so if you could take a second to look at slide 47 and we'll go back to Brad here for a couple of more questions. WU: Absolutely. WOZNIAK: Brad, the next question that we have for you states, in a same year the taxpayer gets income from two different foreign sources, can both the credit and the deductions be claimed, and I assume that they're using one to claim the credit, one to claim the deduction. HORTON: Yes, I think that what it sounds like. And another good question that we didn't really touch on per se. But, yes, the credit and deduction can both be claimed. Say, you've got income from foreign country B and income from foreign country C. Well, let's say for foreign country B, you want to claim the credit for the taxes paid to that country and that's A OK. And then for foreign country C, you decide I'm going to take the deduction for this, maybe it was with a country with sanctions or whatever so we're not allowed to credit for that country so then they would take the deduction for taxes paid to that country. But, again, a great question and it's in the same year that the taxpayer does get income from two different foreign sources, then the credit and deduction can both be claimed, it's just on the same taxes.

You can't say I paid $500 to country ABC. I just can't claim the foreign tax credit and the foreign tax deduction on those same $500 in taxes that I paid. And hopefully I cleared that up.

And if I may, I see some questions here asking when is my question going to be answered, et cetera. And I would just say that we're working as hard as we can to get through them. I think we've had over 600 questions, so we are diligently working as quickly as we possibly can, so.

Thank you for your patience. WOZNIAK: You bet. Thanks for that clarification. And my gosh only 600 questions, OK. We'll move more quickly. Brad, I heard you say that the foreign tax credit can only be used against the same type of income earned in the U.S. So, if someone has rental income in a foreign country but no rental income in the U.S. will they be double taxed on that income?

HORTON: All right. Another good question, let me just make sure I understand it correctly, but they are asking that the FTC can only be used against the same type of income earned in the U.S.

And it's not the U.S. that makes a difference. We categorize it as passive or general. So, say what I am saying here, and I hope this explains it, is say you have rental income in a foreign country and you also have general income, but it's basically wages. So, the point I am trying to get across is that you segregate the rental income as passive and the wages there as general. And so, I mean chances are if they have rental income in a foreign country but no rental income in the U.S., yes, they will be taxed on that income in the U.S. I mean we tax people on every source of income they get whether it happened in the U.S. or not. So, say, you are a U.S.

citizen or a U.S. resident and say you have no income from the United States at all, but you have income solely from a foreign country. Well, even though you don't have income from the U.S. but you are a U.S. citizen or resident alien the United States is still going to tax the income from a foreign country because we tax individuals on their worldwide income. And I know that that's not the case in a lot of countries, but that is the case here. So, in essence the U.S. is going to tax that income and then the foreign country I'm sure is going to tax that income as well, and that's the purpose, the ultimate purpose of the foreign tax credit, to alleviate that double taxation. So hopefully that addresses the question there. WOZNIAK: No, that's great, Brad, thanks and I am going to give you a real easy one here before we turn it back over to Jim.

Someone is asking that you repeat the title of GILTI, again, give the acronym and exactly what it stands for? HORTON: OK, sure and just to clarify, it doesn't mean that we are suggesting that they are guilty. It is Globally Intangible Low Tax Income. And we always chuckle when we hear that because it just sounds so sinister and bad, but again, the acronym for GILTI is Global Intangible Low Tax Income. WOZNIAK: And just to clarify that, that's GILTI, it's not the traditional spelling of guilty. HORTON: Correct, correct. WOZNIAK: And, Jim, we'll turn it back over to you. Any comments on covering the currency translation rules? WU: Yes, Brian. I apologize. I am not sure what happened I think that slide was just skipped over WOZNIAK: Yes, I think that's exactly what happened. Actually, we may have just missed it entirely. WU Yes.

Yes. I really apologize for that. And we can take a minute here if you like and I can go over this slide. WOZNIAK: Absolutely. WU: OK, very good. So, OK, so with the currency translation rule which you can put that slide back up on the, there it is. All right. So as everyone, you are probably aware of the foreign tax credit computation requires us who deal with currency exchange rate. And generally, if you are using the paid t or the taxpayer is using the paid method to claim the foreign tax credit the taxpayer would have to use the exchange rate in effect for translation purposes to the U.S. dollar on the date foreign taxes were paid. And that applies to estimated tax payments and taxes withheld. But on the other hand, if the taxpayer claims a credit for foreign taxes by using the accrued method the taxpayers are allowed to elect, to use the accrued method, then the taxpayer must generally use the average exchange rate for the tax year as long as two conditions have to be met. The first condition is the foreign taxes were paid on or after the first day of the tax year to which they relate. But no later than two years after the close of that tax year so it will be, so the tax even though accrued say on the 2015 return, perhaps they haven't paid it, it's just accrued. But in order to use the average exchange rate, the taxpayer must have paid the tax within two years after the close of that tax year. And the second condition is the foreign taxes are not paid in inflationary currency. Inflationary currencies are defined in a Form 1116 in instructions. And we will refer to that, they will explain it much better than I can here. And this rule applies to taxes paid or accrued in the tax years beginning after November 6, 2007. Now there is an election that is available to the accrued method taxpayers and that's an election to use the exchange rate on the date paid rather than the average. So, if the taxpayer is using the accrued method is otherwise required to translate on currency using the average rate the taxpayer may nonetheless elect to use the exchange rate in effect on the date the foreign taxes were paid, if the taxes are denominated in a non-functional currency. Again, I'm not going to do a deep dive into what non-functional currency, foreign currency. Publication 514 has some specific instructions in what the taxpayer needs to do to make this election, but once made the election applies to the tax year for which made and all subsequent tax years unless it's revoked with the consent of the Internal Revenue Service. OK, so I think that pretty much in a kind of a nutshell. WOZNIAK: Yes, that was great. WU: And apologies again skipping over that. WOZNIAK: No, no worries at all, Jim. I do have a couple more questions for you, though, we'll just continue on with our Q and A session here. The next question we have is, can the foreign tax credit be used to offset self-employment tax? WU: OK, and a simple answer to that is no because the self-employment tax is not an income tax. So, if you, remember, we talked about the limitation fraction and what's taking into consideration there is only the U.S. tax liability, meaning U.S. income tax. And if you even look at the tax form itself, the 1040 the self-employment tax line comes after the foreign tax credit. So, the foreign tax credits has already been accounted for and it has reduced the regular U.S. income tax liability, and then comes the self-employment tax. So, no, the foreign tax credit does not reduce a self-employment tax. WOZNIAK: OK. It makes sense.

And one more question for you, Jim, keep your thinking cap on. And the question is, should a taxpayer with foreign rental income use the foreign branch basket on Form 1116? WU: Generally, would go into the passive basket or category. However, if a business or maybe a corporation is speaking, your rental income is considered passive income, so I would say most of the income set up like a real estate company offshore, it has a branch there and their main income or their active income is rental. And that's a business. So, it's conceivable then that that income could be categorized or characterized as a foreign branch income, so it just depends on circumstances. WOZNIAK: OK. That's great. Brad, we'll transition back to you. A couple of quick questions here. The first one is, income from Puerto Rico, U.S. or foreign? HORTON: Kind of a, it depends on what we are dealing with here but for foreign tax credit purposes income from Puerto Rico would be considered foreign source income. So, for instance you can get a U.S.

foreign tax credit on some or all of the income that you paid to Puerto Rico, so that it would be, even it is a territory of the U.S. and an absolutely lovely place to go and perfect weather year round which is outside our scope here, but yes, for FTC purposes it would be considered a foreign country. I hope that helps. WOZNIAK: OK. Consider it a foreign country, and a wonderful place to visit, a plug to visit Puerto Rico. Brad, our next question also to you is what does income resourced by treaty mean? HORTON: All right. Income resourced by treaty is basically income that let's say it originated in the United States, so for all intensive and purposes it should be considered U.S. sourced income. However, treaty rates or the different nuances of a treaty may consider it to be foreign sourced. For instance, the foreign country may reserve the right to tax that individual as if they were a citizen or resident of that foreign country, so we, the United States, we delay, defer to the treaty. And so, for instance that income, even though earned in the United States the treaty basically treats it as if it is foreign sourced income and therefore under those situations it would be allowable for the foreign tax credit just because the treaty overruled the tax law in this case which is actually the tax law and just made that income foreign sourced. So that's basically what income resource by treaty is. WOZNIAK: OK, great. And, Brad, I am going to try one more with you. Someone is asking if you know the Internal Revenue Code Section for Category G for lump sum distributions if you happen to know that off the top of your head? HORTON: I believe off the top of my head yes and actually here I see it in my notes it is Section 409 Cap A for lump sum distributions. And again, that is Section 409 Capital A. WOZNIAK: Great. Wonderful. OK. Well, a couple more.

Back to you, Jim, here is your next question. My client is a non-resident alien who has U.S.-sourced partnership income as a limited non-active partner. Does he get a credit for foreign taxes paid on the same income, how does this work? WU: Yes, so, that's a very good question. And for the answer I would assume the taxpayer is a non-resident filing of Form 1040 NR. I am just going to make that assumption. Now obviously the income is both taxed here in the United States and taxed in a foreign country. So, in this case in order to mitigate double taxation I would say yes. With the individual non-resident we'll be able to claim a foreign tax credit on the portion of income that the taxpayer is also reporting on the U.S. tax return.

And a lot of people probably don't know this but on the 1040 NR, the non-resident taxpayer filing a 1040-NR actually is able to claim the foreign tax credit as long as there is double taxation, meaning that are assessed both on the U.S. and in a foreign country. WOZNIAK: OK. That's great.

This question, I think it's geared toward you, Jim, but it may be kind of open-ended for either one of you, so feel free to jump in. The question is, do we include the income and tax on Form 1116 of claiming foreign-earned income exclusion under Code Section 911? WU: OK, let me jump in first and Brad can come in and add something if he wishes So, we do have, we did cover this topic in our presentation, so basically the amount that's excluded under Section 911 from U.S.

taxation. That amount both in terms of the income, for foreign income that's excluded and the tax, foreign taxes related to that foreign income that's excluded will have to be adjusted. In other words, it will not be included on the Form 1116 because there's no double taxation here.

At least from the U.S. standpoint there's no U.S. tax assessed on that portion that's stated under the Code Section 911. Brad? HORTON: Yes, Jim, I think you answered that very well. Again, and I would like to mention this just in case I don't get to it. But I've seen a lot of questions also asking whether or not you can claim both the foreign tax credit and the foreign earned income exclusion. And the answer to that is yes, you can claim both. However, the issue is that income that you've excluded you can't use that in your foreign tax credit computation because you would basically be getting a double benefit. So, I just wanted to add that to your question there, Jim, and hopefully that makes sense everybody on the line. WOZNIAK: Yes, that seems to be a recurring theme, but I think you pretty much clarified it. You cannot use the same income to claim both the deduction and the credit. So, a couple more question questions, we have just a few more minutes here. Jim, or no, actually I will throw this out to Brad. Brad, what kind of supporting documents should the taxpayer keep for the foreign tax credit claimed, what do they need, what needs to be checked in order to prove or substantiate they are eligible? HORTON: All right, yes, that's a great question. Basically, you want to have something showing that you were assessed, the tax by the foreign country, something similar to, just something official from that country saying John Smith was assessed for $1,000. You also want to be able to show that you paid it, so showing that it was withdrawn from your account, showing a receipt from that foreign country. And also, the foreign tax return would also be a plus to include as well. Basically, you just want to be able to prove that you were assessed the taxes that you are claiming that you were assessed and paid them at the cash basis of taxpayer. Just something like that, just proof from that taxing jurisdiction, that taxing authority showing that you were actually assessed, the tax, as well as the tax returns. So hopefully that clears that up. A great question, by the way. WOZNIAK: OK. It does.

Obviously, some of it is based on specific facts and circumstances, but you have to have enough to substantiate it. Brad, next question we have for you, someone is asking that you clarify, they state, did he say that we cannot take a foreign tax credit or deduction if the foreign country is sanctioned but that we can deduct it if we itemize deductions? HORTON: Generally, the situation is you cannot take the foreign tax credit if the country is sanctioned. So, you can pretty much probably just Google whatever countries the United States has sanctions on. So, taxes paid to those countries you would not be able to claim the foreign tax credit. Or generally when you are completing your foreign tax credit, you would fill out Form 1116 only up to line 17. However, generally in most cases you would be able to still claim a deduction. So even though the country is sanctioned, and you can't claim a foreign tax credit, you could fill out a complete schedule A, Itemized Deductions for that as well. Back to you, Brian. WOZNIAK: No that's great. And, Brad, I have one more for you, they keep coming in, is tax based on wealth creditable foreign tax? HORTON: Generally, taxes based on wealth, such as wealth taxes.

You see this a lot in Europe. Those would not be considered creditable taxes for FTC purposes.

So, you what it should be an income tax, or a tax in lieu of an income tax. And most of the places, the reasoning behind that is most of the places where the wealth taxes are coming from, there's also an income tax, the wealth tax will be based on the income tax. We could get into specifics, and yes, maybe make the argument that it was based off of net gain, but the general rule is no. Wealth taxes are not creditable for foreign tax credit purposes. Good question.

WOZNIAK: OK, that's great information. Listen, we are coming up near the top of the second hour of the webinar, so we are going to have to close it, that's really all the time we have for questions. We see that there are quite a few in there. Please keep in mind that you have all those resources that Jim previously referenced them. Before we close out the Q and A session Brad and Jim, I am going to turn it back to each of you or however you want to handle it both. What are the most important points you want the attendees to remember from today's web conference?

Brad let's start with you. HORTON: All right, thank you, Brian. Basically, what I want the main points I would like for attendees to remember is to make sure that you properly source your income as either U.S. source or foreign source. For instance, we don't want to have U.S.

source income included in your Form 1116 computation because when you do that you are going to be overstating your foreign tax credit, and you'd be getting a benefit that you are not entitled to. Additionally, we want to make sure that we only include again that foreign source income in the FTC computation and if it we do not source income properly, then we might unfortunately put U.S. sourced income in that computation. And along that same line we want to make sure that we put our income into the proper category. So passive income such interest, dividends, capital gains should go in the passive category. Whereas general category income, things like wages, salaries, tips, guaranteed payments, those should be included in your general category. We don't want to mix them in the categories, because again that can overstate the FTC. And then just based on the questions I am seeing here I would like to state that I don't know, hopefully there was no confusion, but you can, again, just to reiterate, you can claim both foreign tax credit and the foreign earned income exclusion. The point we are trying to make is that on income that you've excluded under Section 911 for the foreign income exclusion you can't use that income to compute the foreign tax credit, because basically you would be saying that you paid taxes on income, foreign income that you didn't pay. So again, you can claim both the FTC and FEIE, just the income that was excluded under the FEIE you can't claim the foreign tax credit on that.

So that's what I'd really like for respondents to take away from today and that's all I've got.

WOZNIAK: OK, Jim, how about you? WU: Yes, I do have a few points I would like the audience to take away. And we've talked about the four basic requirements which I call the, sort of like the bread and butter of FTC, and that is in order for a foreign tax to be creditable they have to meet those four tests. Number one is that the tax must be imposed on the taxpayer. Number two, briefly is that the taxpayer must have paid or accrued the tax. Number three, tax must be legal and actual foreign tax liability and finally the tax must be an income tax or a tax imposed in lieu of an income tax, based on U.S. tax principles. And we didn't discuss the treaty rate versus statutory reporting. If the U.S. has a tax treaty with the foreign country their legal liability is always based on the treaty rate. And then we briefly discussed the currency translation and reduction to the foreign tax due to the foreign earned income exclusion again.

And so, to summarize that really briefly, as Brad had already shared to the extent the portion of the foreign income is excluded from U.S. taxation, the related foreign taxes are not eligible for the FTC. And then finally we wrap up our discussion by going over the FTC carryback and carryover rules, that is back one year and forward 10 years, talked about the limitation fraction to the FTC, and we discussed briefly the substantiation requirements in order for foreign tax to be claimed. And I think that's about it, Brian, back to you. WOZNIAK: OK, thanks, Jim and thank you, Brad. A couple of items as we transition into closing here, we are planning additional webinars throughout the year. So, to register for any upcoming IRS webinars, just visit irs.gov and do a keyword search using the word webinars and we have webinars for tax practitioners, small businesses, et cetera. And of course, you can always visit the IRS Video Portal at www.irsvideos.gov. And that Video Portal does contain video and audio presentations on topics of interest to small business owners, tax professionals, individuals, et cetera. And don't forget to connect with us tomorrow January 31st for our earned income tax credit Twitter chat at 1:00 PM Eastern Time and that's hashtag EITC chat. And again, I just wanted to give a big thank you to Brad Horton and Jim Wu for a great webinar. And I also want to thank you, our attendees for attending today's webinar, again, the Foreign Tax Credit. Now if you did attend the webinar for at least 100 minutes on the official start time you will receive a certificate of completion that you can use with your credentialing organization for two possible credits, and if you stayed on for at least 50 minutes you will qualify for one credit. Now if you are eligible for continuing education from the IRS and you registered with your PTIN, we will post that credit in your PTIN. If you are eligible for continuing education from the California Tax Education Council your credit will be posted to your CTEC account. And if you are registered with the Florida Institute of CPAs, your participation information will be provided directly to them. Now, if you qualify and have not received your certificate by February 24th, you need to email us at the address listed on the bottom of the slide, you see it there, CL.SL.Web.Conference.Team@IRS.Gov.

But again, you need to wait until February 20th. Now finally, the survey we would appreciate if you would take just a few minutes to complete a short evaluation before you exit today. If you liked this session and you want to have more like it, let us know, if you have thoughts on how we can make them better. You can let us know that as well. If you have any requests for future webinar topics or pertinent information that you would like to see perhaps posted in an IRS factsheet, put it in a tax tip or frequently asked question on irs.gov, just include your suggestion in the comments section of the survey. So, everyone, you can just click that survey button on the left side of your screen to begin. Again, if it doesn't come up you have to make sure those pop-up blockers have been disabled. So finally, in closing, it has been a pleasure to be here with you today. On behalf of the Internal Revenue Service and our presenters thank you for attending today's webinar. We do appreciate our partnership with tax professionals, the small business community, industry associations, et cetera. You make our job a lot easier by sharing all of this information that allows for proper tax reporting. So again, in closing, thank you again for your time and attendance and we wish you much success in your business or practice. This concludes today's webinar, and you may exit the webinar at this time. Thank you.