Carryback and Carryover If, because of the limit on the credit, you cannot use the fullamount of qualified foreign taxes paid or accrued in the tax year, youare allowed a 2-year carryback and then a 5-year carryover of theunused foreign taxes. This means that you can treat the unused foreign tax of a tax yearas though the tax were paid or accrued in your 2 preceding and 5succeeding tax years up to the amount of any excess limit in thoseyears. A period of less than 12 months for which you make a return isconsidered a tax year. The unused foreign tax in each category is the amount ofqualified taxes paid or accrued minus the limit for that category. Theexcess limit in each category is the amount by which thelimit is more than the qualified taxes paid or accrued for thatcategory. Figure your carrybacks or carryovers separately for each separatelimit income category. The mechanics of the carryback and carryover are illustrated by thefollowing examples. Example 1.All your foreign income is in the general limitation incomecategory. The limit on your credit and the qualified taxes paid toCountry X are as follows: Yourlimit Taxpaid Unused foreign tax (+)or excess limit (-) 1997 $100 $50 -50 1998 $200 $100 -100 1999 $300 $500 +200 In 1999, you had unused foreign tax of $200 to carry to otheryears. You are considered to have paid this unused foreign tax firstin 1997 (the second preceding tax year) up to the excess limit in thatyear of $50, and then in 1998 (the first preceding tax year) up tothat year's excess limit of $100. You can then carry forward theremaining $50 of unused tax. Example 2.All your foreign income is in the passive income category. In 1995,you had an unused foreign tax of $200. Since you had no foreign incomein 1993 and 1994, you cannot claim a credit for the unused foreigntaxes in those years. You can, however, carry forward the unused taxto 1996, 1997, 1998, 1999, and 2000. The limit on your credit and thequalified foreign taxes paid on passive income are as follows: Yourlimit Taxpaid Unused foreign tax (+)or excess limit (-) 1995 $600 $800 +200 1996 $600 $700 +100 1997 $500 $700 +200 1998 $550 $400 -150 1999 $800 $700 -100 2000 $500 $550 +50 You are not considered to have paid the $200 of unused foreign taxfrom 1995 in 1996 or 1997 since you have no excess limit in either ofthose years. Therefore, you carry the tax forward and are consideredto have paid it in 1998, up to the excess limit of $150. The carryoverreduces your excess limit in that year to zero. The remaining unusedforeign tax of $50 from 1995 can be carried to 1999. At this point,you have fully absorbed the unused foreign tax from 1995 and can carryit no further. You can also carry forward the unused foreign tax from1996 and 1997. Effect of bankruptcy or insolvency.If your debts are canceled because of bankruptcy or insolvency, youmay have to reduce your unused foreign tax carryovers to or from thetax year of the debt cancellation by 33 1/3 for each $1of canceled debt that you exclude from your gross income. Yourbankruptcy estate may have to make this reduction if it has acquiredyour unused foreign tax carryovers. Also, you may not be allowed tocarry back any unused foreign tax to a year before the year in whichthe bankruptcy case began. For more information, see Reduction ofTax Attributes in Publication 908, Bankruptcy Tax Guide. Time Limit onTax Assessment When you carry back an unused foreign tax, IRS is given additionaltime to assess any tax resulting from the carryback. An assessment canbe made up to the end of one year after the expiration of thestatutory period for an assessment relating to the year in which thecarryback originated. Claim for Refund If you have an unused foreign tax that you are carrying back to thefirst or the second preceding tax year, you should file Form 1040X foreach earlier tax year to which you are carrying the unused foreigntax, and attach a revised Form 1116. Taxes All Creditedor All Deducted In a given year, you must either claim a credit for all foreigntaxes that qualify for the credit or claim a deduction for all ofthem. This rule is applied with the carryback and carryover procedure,as follows: You cannot claim a credit carryback or carryover from a yearin which you deducted qualified foreign taxes, You cannot deduct unused foreign taxes in any year to whichyou carry them, even if you deduct qualified foreign taxes actuallypaid in that year, and You cannot claim a credit for unused foreign taxes in a yearto which you carry them unless you also claim a credit for foreigntaxes actually paid or accrued in that year. Unused taxes carried to deduction year.If you carry unused foreign taxes to a year in which you chose todeduct qualified foreign taxes, you must compute a foreign tax creditlimit for the deduction year as if you had chosen to credit foreigntaxes for that year. If the credit computation results in an excesslimit (as defined earlier) for the deduction year, you must treat theunused foreign taxes carried to the deduction year as paid or accruedin that year. You cannot actually deduct or claim a credit for theunused foreign taxes carried to the deduction year. But, thistreatment reduces the amount of unused foreign taxes that you cancarry to another year. Because you cannot deduct or claim a credit for unused foreigntaxes treated as paid or accrued in a deduction year, you will get notax benefit for those taxes (the amount absorbed) unless you file atimely refund claim or an amended return to reverse your choice fromdeducting the taxes to claiming the credit. You have ten years fromthe due date of the return for the deduction year to make this change.See Making or Changing Your Choice, discussed earlier,under Choice To Take Credit or Deduction. Example.In 1999, you paid foreign taxes of $600 to Country X on income inthe passive income category. You have a foreign tax credit carryoverof $200 from the same category from 1998. For 1999, you figure yourforeign tax credit limit to be $700. If you choose to claim a credit for your foreign taxes in 1999, youwould be allowed a credit of $700, consisting of $600 paid in 1999 and$100 of the $200 carried over from 1998. You will have a creditcarryover to 2000 of $100, which is your unused 1998 foreign taxcredit carryover. If you choose to deduct your foreign taxes in 1999, your deductionwill be limited to $600, which is the amount of taxes paid in 1999.You are not allowed a deduction for any part of the carryover from1998. However, you must treat $100 of the credit carryover as used in1999, because you have an unused credit limit of $100 ($700 limitminus $600 of foreign taxes paid in 1998). This reduces your carryoverto later years. If you claimed the deduction for 1999 and later decided you wantedto receive a benefit for that $100 part of the 1998 carryover, youcould reverse the choice of a deduction for 1999. You would have toclaim a credit for those taxes by filing an amended return for 1999within the time allowed. Figure A. Allocation Between Husband and Wife Married Couples Buchen Sie die Top-Hotels in SopotFor a tax year in which you and your spouse file a joint return,you must figure the unused foreign tax or excess limit in eachseparate limit category on the basis of your combined income,deductions, taxes, and credits. For a tax year in which you and your spouse file separate returns,you figure the unused foreign tax or excess limit by using only yourown separate income, deductions, taxes, and credits. However, if youfile a joint return for any other year involved in figuring acarryback or carryover of unused foreign tax to the current tax year,you will need to make an allocation, as explained underAllocations Between Husband and Wife, later. Continuous use of joint return.If you and your spouse file a joint return for the current taxyear, and file joint returns for each of the other taxyears involved in figuring the carryback or carryover of unusedforeign tax to the current tax year, you figure the joint carryback orcarryover to the current tax year using the joint unused foreign taxand the joint excess limits. Joint and separate returns in different years.If you and your spouse file a joint return for the current taxyear, but file separate returns for all the other tax years involvedin figuring the carryback or carryover of the unused foreign tax tothe current tax year, your separate carrybacks or carryovers will be ajoint carryback or carryover to the current tax year. In other cases in which you and your spouse file joint returns forsome years and separate returns for other years, you must make theallocation described in Allocations Between Husband and Wife. Allocations BetweenHusband and Wife You may have to allocate an unused foreign tax or excess limit fora tax year in which you and your spouse filed a joint return. Thisallocation is needed in the following three situations. You and your spouse file separate returns for the currenttax year, to which you carry an unused foreign tax from a tax year forwhich you and your spouse filed a joint return. hotel rooms BathYou and your spouse file separate returns for the currenttax year, to which you carry an unused foreign tax from a tax year forwhich you and your spouse filed separate returns, but through a taxyear for which you and your spouse filed a joint return. You and your spouse file a joint return for the current taxyear, to which you carry an unused foreign tax from a tax year forwhich you and your spouse filed a joint return, but through a tax yearfor which you and your spouse filed separate returns. These three situations are illustrated in Figure A.In each of the situations, 1999 is the current year. Method of allocation.For a tax year in which you must allocate the unused foreign tax orthe excess limit for your separate income categories between you andyour spouse, you must take the following steps. Figure a percentage for each separate income category bydividing the taxable income of each spouse from sources outside theUnited States in that category by the joint taxable income fromsources outside the United States in that category. Then, apply eachpercentage to its category's joint foreign tax credit limit to findthe part of the limit allocated to each spouse. Figure the part of the unused foreign tax, or of the excesslimit, for each separate income category allocable to each spouse. Youdo this by comparing the allocated limit (figured in (1)), with theforeign taxes paid or accrued by each spouse on income in thatcategory. If the foreign taxes you paid or accrued for that categoryare more than your part of its limit, you have an unused foreign tax.If, however, your part of that limit is more than the foreign taxesyou paid or accrued, you have an excess limit for that category. Allocation of the carryback and carryover.The mechanics of the carryback and carryover, when allocationsbetween husband and wife are needed, are illustrated by the followingexample. Table 5. Carryback/Carryover Example.A Husband (H) and Wife (W) filed joint returns for 1995, 1997, and1998 and separate returns for 1996 and 1999. Neither H nor W had anyunused foreign tax or excess limit for any year before 1995. For thetax years involved, the income, unused foreign tax, excess limits, andcarrybacks and carryovers are in the general limitation incomecategory and are shown in Table 5. W's allocated part of the unused foreign tax from 1995 ($30) ispartly absorbed by her separate excess limit of $20 for 1996, and thenfully absorbed by her allocated part of the joint excess limit for1997 ($20). H's allocated part of the unused foreign tax from 1995($50) is fully absorbed by his allocated part of the joint excesslimit ($65) for 1997. H's separate unused foreign tax from 1996 ($25) is partly absorbed(up to $15) by his remaining excess limit in 1997, and then fullyabsorbed by W's remaining part of the joint excess limit for 1997($10). Each spouse's excess limit on the 1997 joint return is reducedby: Each spouse's carryover from earlier years (W's carryover of$10 from 1995 and H's carryovers of $50 from 1995 and $15 from1996). The other spouse's carryover. (H's carryover of $10 from1996 is absorbed by W's remaining excess limit.) W's allocated part of the unused foreign tax of $69 from 1998 ispartly absorbed by her excess limit in 1999 ($10), and the remaining$59 will be a carryover to the general limitation income category for2000 and the following 3 years unless absorbed sooner. H's allocatedpart of the unused foreign tax of $104 from 1998 is partly absorbed byhis excess limit in 1999 ($50), and the remaining $54 will be acarryover to 2000 and the following 3 years unless absorbed sooner. Joint Return Filedin a Deduction Year When you file a joint return in a deduction year, and carry unusedforeign tax through that year from the prior year in which you andyour spouse filed separate returns, the amount absorbed in thededuction year is the unused foreign tax of each spouse deemed paid oraccrued in the deduction year up to the amount of that spouse's excesslimit in that year. You cannot reduce either spouse's excess limit inthe deduction year by the other's unused foreign taxes in that year.