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See section 907(f). Demystifying the Form 1118 Foreign Tax Credit - SF Tax Counsel PDF Analysis of Original Bill SUBJECT - California Total, Passive income doesn't include high-taxed income. In determining your U.S. source income, reduce the amount of any capital losses from U.S. sources by the amount you entered on line 4 of Worksheet A or line 5 of the Line 2 Worksheet for Worksheet B. See Regulations section 1.904-4(c) for more information. Enter the amount from line 18 of the Qualified Dividends Tax Worksheet or line 40 of Schedule D. Enter the amount from line 14 of the Qualified Dividends Tax Worksheet or line 36 of Schedule D. Enter the amount from line 8 of the Qualified Dividends Tax Worksheet or line 30 of Schedule D. If you figured your tax using the Schedule D Tax Worksheet (in the Schedule D (Form 1040) instructions or in the Schedule D (Form 1041) instructions), you may have to use the Worksheet for Line 18 to figure the amount of tax to enter on line 18 of Form 1116. Complete lines 510 and skip the rest of this worksheet. Unused foreign taxes in the pre-2018 separate category for general income carried forward are generally allocated to your post-2017 separate category for general income. The foreign tax liability is denominated in any inflationary currency. For more information on how to complete your Form 1116 and Form 1118 when making this election, see sections 960 and 962 and Pub. You must allocate the $2,000 loss between the passive category income and the certain income re-sourced by treaty category in the same proportion as each category's income bears to the total foreign income. Special rules for carryforwards of pre-2018 unused foreign taxes. The first had a loss from general category income of $2,000 on line 15, the second had passive category income of $4,000 on line 15, and the third had income of $1,000 from the certain income re-sourced by treaty category on line 15. Beginning in 2026, this effective rate will be increased to 13.125 percent. U.S. citizens living in certain treaty countries may be able to take an additional foreign tax credit for foreign tax imposed on certain items of income from the United States. Accrued foreign taxes not eligible for conversion at the yearly average exchange rate must be converted using the exchange rate on the date of payment of the tax. Form 1040-NR filers. Demystifying the IRS Form 5471 Part 4. Schedule J Inflationary currency means the currency of a country in which there is cumulative inflation during the 36 calendar months immediately preceding the last day of the tax year of at least 30%, as determined by reference to the consumer price index of the country listed in the monthly issues of International Financial Statistics, or a successor publication, of the International Monetary Fund.