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This form is not mandatory. It is used to claim a credit for income taxes paid to a foreign country when U.S. taxes are also paid on the same income. Form 1116 is to be used by individuals, estates or trusts.
Individuals with less than $300 per person ($600 on a joint return) of foreign taxes may be able to claim a foreign tax credit without the complication of filing a Form 1116. (See "Comments" below.)
The required information includes the country to which the tax was paid, the amount and type of income on which the foreign tax was based, any deductions or losses applicable to that income and the computation of the credit. An assortment of worksheets in the instructions may also be required in order to compute the credit. A separate calculation of the foreign tax credit may be required for taxpayers who are subject to the alternative minimum tax.
This form is to be included with a personal, trust or estate tax return.
The IRS estimate of the average time required to prepare this form is about four hours. The preparation time may vary from a few extra minutes in addition to the time required to prepare the rest of a taxpayer's Form 1040 (or Form 1041) to many more hours than estimated by the IRS. Most of the computer software used by most tax preparers and even the home computer software used by taxpayers (such as Turbo Tax) include calculations of the Foreign Tax Credit.
There are no penalties for a failure to file this form other than the loss of a credit as an offset against any U.S. taxes imposed on the same income.
In order to use the "simplified" method of claiming the foreign tax credit of up to $300 per person, the foreign taxes must be applicable to passive investment income and must have been reported to the taxpayer and the IRS on a Form 1099-DIV, 1099-INT, K-1 or similar substitute form. The credit is limited by the alternative minimum tax -- which is Form 6251 for individuals. If the taxpayer is not able to fully utilize the available credit, the foreign taxes paid may be claimed as an itemized deduction instead of as a credit.
An individual may not claim a foreign tax credit paid by a foreign corporation even if it is a controlled foreign corporation for which the individual must pay taxes on its subpart F income.