Foreign Tax Credit

Foreign Tax Credit

If you paid or accrued foreign taxes to a foreign country on foreign source income and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes.

Taken as a deduction, foreign income taxes reduce your U.S. taxable income.

Taken as a credit, foreign income taxes reduce your U.S. tax liability. In most cases, it is to your advantage to take foreign income taxes as a tax credit.

Once you choose to exclude either foreign earned income or foreign housing costs, you cannot take a foreign tax credit for taxes on income you can exclude. If you do take the credit, one or both of the choices may be considered revoked.

Above the line deductions

Business deduction

Rental and Royalty Expenses

Rental and Royalty expenses are treated similar to business expenses in that they are not reported directly on Form 1040.  These expenses will be reported along with the associated revenues on 1040 Schedule E.  Even though Rental and Royalty activities are typically considered to be investing activities they are still accounted for Above the Line.  Like the Schedule C for businesses, the net income or loss on Schedule E will be transferred to Form 1040.  One important thing to note is that rental losses are subject to limitations.

Losses

Losses are broken into two categories for tax purposes: business entities selling business assets at a loss and individual taxpayers selling capital assets (investments) at a loss.  The difference lies in the amounts that can be deducted in the current year.  Business assets sold at a loss will be accounted for Above the Line and are deducted For AGI.  On the other hand, individual taxpayer losses can be used to offset capital gains.  If a loss is incurred above that of capital gains—resulting in a net loss—the taxpayer may deduct $3,000 in the current tax year and the remainder will be carried over to subsequent years.

Moving Expenses (Taxpayers Who Move For Work)

Health Insurance Deductions

Self-Employment Tax Deduction

Early Withdrawal from Savings Penalties

Interest Expense for Qualified Education Loans (not for m.f.s)

Deduction for Qualified Educational Expenses

Itemized deduction

Taxes

The following taxes are eligible to be claimed as itemized deductions during the current tax year:

• State, local, and foreign income taxes. These taxes include all estimated tax payments, overpayments made in a prior year that are applied to the current year, and employer withholdings.
• Personal property taxes based on the value of the property.
• Investment property real estate taxes.
• Personal property real estate taxes.

Qualifying moving expense

Moving Expenses (Taxpayers Who Move For Work)

Use Form 3903 Moving Expenses

Individuals who move for the purpose of gaining new employment could qualify for a moving expense deduction. Moving expenses are accounted for Above the Line—For AGI—if the taxpayer meets the following two requirements: a distance test and time associated with the move.

• Distance Test: The distance from the taxpayer’s old residence to their new place of employment must be more than 50 miles greater than from their old residence to their old place of employment.  An increase in the daily commute of greater than 50 miles justifies a need to move closer to the new job.
• Time Test:  The time test is satisfied if the taxpayer is employed full-time at least 39 of the first 52 weeks or self-employed 78 of the first 104 weeks after the move.  A slight deviation can be made for the Time Test in that the taxpayer may deduct the moving expenses if they have not met the requirement by year end but expect to meet the time test in the following year.  If a taxpayer later fails to meet the requirements they will be required to amend their previous tax return or claim the deduction as income on their current return.

Deductions include items such as traveling to the new residence and the cost of moving personal possessions.  If a taxpayer decides to deduct mileage rather than actual expenses related to driving their personal vehicles they are allowed to deduct 23.5 cents per mile.  These deductions do not apply to a taxpayer searching for a new residence.  The costs of meals while moving are not deductible.  If an employer reimburses dollar for dollar expenses the taxpayer excludes the amount from income and they do not claim the deduction.  On the other hand, if an employer offers a flat rate for moving the taxpayer must include the moving allowance in their income but can then claim the deduction for actual moving expenses.  (See Publication 521 for more details.)